<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

     [X] Annual Report under Section 13 or 15(d) of the Securities  Exchange Act
of 1934 For the fiscal year ended December 31, 1996 Commission File No. 1-12508

     [ ] Transition Report under Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the transition period from to .

                          MAGNUM HUNTER RESOURCES, INC.
                 (Name of small business issuer in its charter)

           Nevada                                       87-0462881
State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization                       Identification No.)

           600 East Las Colinas Blvd., Suite 1200, Irving,Texas 75039
               (Address of principal executive offices) (zip code)

Issuer's telephone number, including area code:  (972) 401-0752


Securities registered under Section 12(b) of the Exchange Act:

     Title of each class             Name of each exchange on which registered

Common Stock ($.002 par value)                American Stock Exchange

Securities registered under Section 12(g) of the Act:  None

Check  whether  the Issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the Issuer was required to file such
reports)  and (2) has been subject to such filing  requirements  for the past 90
days. Yes X No

Check  if no  disclosure  of  delinquent  filers  in  response  to  Item  405 of
Regulation S-B is contained in this form,  and no disclosure  will be contained,
to the best of the  Issuer's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

The Issuer's revenues for its most recent fiscal year: $16,412,000.

As of March  18,  1997,  the  aggregate  market  value of voting  stock  held by
non-affiliates,  computed by reference  to the closing  price as reported by the
American Stock Exchange, was $65,799,156.

The number of shares  outstanding of the Issuer's  common stock at February 28,
1997: 13,708,327.



                                        

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                                      INDEX

                       Securities and Exchange Commission
                           Item Number and Description


                                     PART I

Item 1     Description of Business.......................................  3
Item 2     Description of Properties..................................... 16
Item 3     Legal Proceedings............................................. 21
Item 4     Submission of Matters to a Vote of Security Shareholders...... 21


                                     PART II

Item 5     Market for Common Equity and Related Stockholder Matters...... 22
Item 6     Management's Discussion and Analysis or Plan of Operations.... 23
Item 7     Consolidated Financial Statements............................. 29
Item 8     Change in and Disagreement with Accountants
              on Accounting and Financial Disclosure..................... 30


                                    PART III

Item 9    Directors Executive Officers, and Control Persons; Compliance with
               Section 16(a) of the Exchange Act......................... 31
Item 10   Executive Compensation......................................... 35
Item 11   Security Ownership of Certain Beneficial Owners and Management. 36
Item 12   Certain Relationships and Related Transactions................. 37
Item 13   Exhibits and Reports on Form 8-K............................... 38




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                                     PART I

Item 1.           Description of Business

The Company

     The Company is an independent  energy company  engaged in the  acquisition,
development,  exploration  and  operation of oil and gas  properties  within the
United States. In December 1995,  Magnum  Petroleum,  Inc. and Hunter Resources,
Inc. combined their oil, gas and other assets (the "Magnum Hunter Combination"),
with the management of Hunter Resources,  Inc. assuming operating control of the
Company.  The  new  management   implemented  a  business  strategy  emphasizing
acquisitions  of  long-lived  properties  in  established  producing  areas with
significant  development potential. In June 1996, the Company acquired for $34.7
million  property  interests in the Texas  Panhandle  and Western  Oklahoma (the
"Panoma  Properties").  The  Company is in the  process of  completing  a second
acquisition for  approximately  $143.5  million,  which relates to properties in
West Texas and  Southeast  New Mexico (the  "Permian  Basin  Properties").  As a
result of the completed and pending  acquisitions,  the Company intends to focus
on  exploiting  its   substantial   inventory  of  development  and  exploration
opportunities.

     On  December  31,  1996,  the  Company  had an  interest  in 727 wells with
estimated  proved  reserves of 122.6 Bcfe with a pre-tax present value of $164.7
million.  Approximately  63% of these  reserves are  attributable  to the Panoma
Properties.  On a Bcfe basis, these reserves were 74% natural gas with a reserve
life of 72 years.  The  Company  serves as operator  for 71% of its  properties.
Additionally,  the Company owns approximately 575 miles of gas gathering systems
and a 50% interest in a gas  processing  plant in proximity to the gas gathering
system purchased with the Panoma  Properties.  In 1996, the Company had revenues
of  $16.4  million  and  Earnings  Before   Interest,   Tax,   Depreciation  and
Amortization of $6.2 million.

     Since the Magnum Hunter  Combination,  the Company has made six oil and gas
acquisitions  for an  aggregate  purchase  price of $31.9  million and has spent
approximately  $1.95 million on development  and  exploration  activities.  This
strategy  has added  approximately  98.2 Bcfe of  reserves  at their  respective
acquisition  dates at an  average  cost of $.345  per  Mcfe.  As a result of its
completed and pending acquisitions, the Company has achieved substantial growth.

o    Reserves  increased from 36.7 Bcfe at year end 1995 to 122.6 Bcfe at year
       end 1996;

o    Production increased from .28 Bcfe in 1995 to 3.82 Bcfe in 1996;

o    Earnings Before Interest,  Tax,  Depreciation and Amortization  increased
     from $(.5) million in 1995 to $6.2 million in 1996; and

o    Net income  increased from a $968 thousand loss in 1995 to a $509 thousand
     profit in 1996.



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Recent Acquisitions

     The Company believes that its recent  acquisition  activity has provided it
with a significant inventory of development and exploration opportunities. Since
December 1995, the Company has completed six acquisitions (excluding the Permian
Basin Acquisition) for an aggregate consideration of $31.9 million, resulting in
an increase in proved  reserves of 2.679 MMbbls of oil and 81.944 Bcf of natural
gas. The two largest completed acquisitions to-date (excluding the Permian Basin
Acquisition) were the Magnum Hunter Combination and the Panoma Acquisition.

     Magnum  Hunter  Combination.  The  significant  growth  experienced  by the
Company in recent years largely commenced with the Magnum Hunter  Combination in
late 1995, a transaction in which the Company ultimately issued 5,085,077 shares
of  restricted  Common Stock and 111,825  shares of Series C Preferred  Stock to
Hunter  Resources,  Inc.  and assumed the  associated  liabilities  of Hunter to
acquire the subsidiaries of Hunter (the "Hunter  Subsidiaries")  effective as of
December 31, 1995.  The  acquisition  of the Hunter  Subsidiaries  significantly
increased the size and expanded the nature of the Company's business, since such
companies  were engaged in: (i) the  acquisition,  production  and sale of crude
oil; (ii) the  gathering,  transmission  and marketing of natural gas; (iii) the
management  and  operation  of  producing  oil and  natural gas  properties  for
interest owners; and (iv) the business of consulting and U.S. export services to
facilitate  Latin American  trade in energy  products.  The  acquisition of Gruy
Petroleum  Management Company ("Gruy"),  a Hunter Subsidiary that specializes in
the  management  of  producing  properties,  has  enabled  the Company to gain a
significant  level  of  expertise  in  operating  oil  and  gas  properties.  In
connection  with the Magnum  Hunter  Combination,  management of the Company was
replaced by Hunter's management team in December 1995. Estimated proved reserves
for the properties  acquired in the Magnum Hunter  Combination were 3.122 MMBbls
of  oil  and 10.973 Bcf  of  natural  gas  as  of  December  31,  1995.  Total
consideration  paid by the Company for Hunter's  assets was 5,085,077  shares of
Common Stock and 111,825 shares of the Company's  Series C Preferred Stock which
were subsequently converted into 335,475 shares of Common Stock.

         Panoma  Acquisition.  On June 28, 1996, the Company purchased interests
in  520  gas  wells  and an  adjoining  427-mile  gas  gathering  system  from a
subsidiary of Burlington Resources, Inc. ("Burlington"). The net purchase price,
after certain  purchase  price  adjustments,  was  approximately  $34.7 million,
funded by borrowings under the Company's existing credit facility (the "Existing
Credit Facility").  The natural gas wells are located in the Texas Panhandle and
Western Oklahoma and are commonly  referred to as the "Panoma  Properties." Gruy
has  become the  operator  of the gas  gathering  system and the wells that were
previously  operated by Burlington.  Estimated  proved natural gas reserves from
the Panoma Properties were approximately 77.2 Bcf at December 31, 1996.

     On January 1, 1997,  the Company  complemented  its Panoma  Acquisition  by
purchasing for $2.5 million a 50% ownerhsip  interest (100% net profits interest
until payout) in the adjacent gas processing plant referred to as the McLean Gas
Plant. See "Gathering and Processing of Natural Gas."



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Proposed Acquisition

     Overview.  On  February  27,  1997 the Company  entered  into a  definitive
agreement with Burlington to acquire for $143.5 million, effective as of January
1, 1997, the Permian Basin Properties consisting of 25 field areas in West Texas
and 21  field  areas  in  Southeast  New  Mexico  containing  3,100  oil and gas
completions.  The primary producing  formations  include the Yates, Seven Rivers
and Queen in Lea and Eddy Counties,  New Mexico;  the Atoka in the Brunson Ranch
Field in Loving County,  Texas; the Clearfork in the Westbrook Field in Mitchell
County,  Texas;  the San  Andres  in the  Levelland/Slaughter  Field in  Cochran
County,  Texas;  and the Canyon Sand in Sutton County,  Texas. The gross mineral
acres and the net mineral acres of the Permian Basin Properties are, 114,810 and
82,175,  respectively.  Upon consummation of the acquisition, the Company's Gruy
subsidiary  will serve as operator  on  approximately  66% of the Permian  Basin
Properties. Management of the Company believes the Permian Basin Properties will
provide  significant  opportunities for exploitation of both oil and natural gas
reserves  through a combination of enhanced  recovery  projects and new drilling
prospects.

     In accordance with the definitive acquisition agreement, the Company made a
performance  deposit of $10 million  against the $143.5 million  purchase price,
which will be further reduced by  approximately  $8 million to take into account
production  between January 1, 1997 and the closing date. The Company intends to
fund the Permian Basin  Acquisition with proceeds received from a combination of
borrowings under a new credit facility (the "New Credit Facility") for which the
Company  has   received  a  commitment   letter  and  a  private   placement  of
approximately  $50  million  in  securities  under Rule  144(a).  The New Credit
Facility has a borrowing  base of $145  million and will  replace the  Company's
Existing  Credit  Facility.  The  Company's  obligations  under  the  definitive
acquisition agreement are not subject to a financing condition, and it is likely
the Company  would  default  under the  acquisition  agreement if the New Credit
Facility or other  adequate  financing  is not arranged on a timely  basis.  The
closing of the  Permian  Basin  Acquisition,  which is  expected  to occur on or
before April 30, 1997, is conditioned,  in Burlington's  case, upon the approval
of its board of directors  and, in the  Company's  case,  upon the  satisfactory
results of its due diligence with respect to accounting, title and environmental
matters.

     Production  and Reserves.  During 1996,  Burlington's  daily net production
from the Permian Basin Properties averaged over 2.5 MBbl of oil and 2.7 Mmbcf of
natural gas.  Burlington's cash flow from the Permian Basin Properties  exceeded
$27.7 million for the 12-month  trailing  period ended  November 1, 1996 with an
average  oil price of $20.90 per Bbl and an average  natural  gas price of $2.23
per Mcf.

     Ryder Scott Co., independent petroleum engineers in Houston, Texas retained
by the Company,  have  estimated  that as of January 1, 1997,  the Permian Basin
Properties  had proved  reserves of 14,238 MBbl of oil,  99.8 Bcf of natural gas
and 185.3 Bcfe.  Ryder Scott Co.  further  estimated  the future net revenue and
present value for the Permian Basin  Properties to be $452.2 and $237.0 million,
respectively,  as of January 1, 1997.  Approximately  71% of the proved reserves
are proved producing.

     Based on the  Company's  estimated  net purchase  price  allocation of $135
million, the Company will pay approximately $.78 per Mcfe for its acquisition of
the Permian Basin Properties from Burlington.

                                        5

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Development and Exploration Activities

         Overview

     The Company  believes that the properties  acquired through its acquisition
activities have positioned it to expand the focus of its activities from oil and
natural gas property  acquisitions  and  consulting to  exploiting  the acquired
properties  through  drilling.  The  properties  purchased in the Magnum  Hunter
Combination  and the Panoma  Acquisition,  together  with the  properties  to be
purchased  in the Permian  Basin  Acquisition,  offer  significant  exploitation
potential through  development  drilling.  The Company has a $15 million capital
budget for 1997, of which approximately $12 million is allocated for development
drilling  and  approximately  $3 million is  allocated  for several  exploration
prospects.  The Company  minimizes  its  overhead  and capital  expenditures  by
subcontracting  the drilling,  redrilling  and workover of wells to  independent
drilling  contractors and by outsourcing  other services.  The Company typically
compensates its drilling  subcontractors on a turnkey (fixed price),  footage or
day  rate  basis  depending  on  the  Company's  assessment  of  risk  and  cost
considerations.  The Company does not plan any material capital expenditures for
development or exploratory  drilling on the Permian Basin Properties in 1997, as
the Company's  management and  professional  staff will require  further time to
efficiently  evaluate the properties being acquired and determine the nature and
priority of the capital expenditures required.

         Development Drilling

     The Company's  development  strategy  focuses on  maximizing  the value and
productivity of its oil and natural gas asset base through development  drilling
and enhanced recovery techniques. In particular,  the Company plans to emphasize
in-fill  drilling  on its  Panoma  Properties  and  several  of its  West  Texas
properties,  to initiate  waterflood  projects on selected West Texas properties
and to drill  lateral  re-entry  wells in its Austin Chalk  properties.  In-fill
drilling  is the process of drilling a well  between  producing  wells to better
exploit the  reservoir.  In a  waterflood,  water is  injected  into a producing
formation to increase  pressure and enhance the hydrocarbon  recovery by forcing
oil into the  producing  well bores.  Lateral  re-entry  wells are wells drilled
horizontally  from existing bore holes into undrained  areas on the lease block.
In exploiting  its producing  properties,  the Company  relies upon its in-house
technical  staff of  petroleum  engineering  and  geological  professionals  and
utilizes the services of outside consultants on a selective basis.

     Panoma  Properties.  The Company believes that  developmental  drilling can
enhance the value of its recently acquired Panoma Properties,  which include the
Brown  Dolomite and Granite Wash  Formations in the Texas  Panhandle and Western
Oklahoma.  The Company has identified over 70 in-fill drilling  prospects on the
Panoma  Properties,  and subject to receiving routine density approvals from the
Railroad  Commission  of Texas (the state oil and gas  regulatory  agency),  the
Company  plans to drill  approximately  40 in-fill  wells on the West  Panhandle
Field through the end of 1997,  thereby  enhancing  the value of the field,  the
adjoining  427- mile gas gathering  system and the McLean Gas Plant in which the
Company acquired an ownership

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     interest in January 1997.  Wells owned by the Company in the West Panhandle
Field are currently  drilled on 640-acre spacing as compared to 160-acre spacing
for wells drilled and owned by the Company on a neighboring field along the same
geologic trend and producing from the same  formations.  These wells,  which are
approximately 2,500 feet deep, are estimated to cost approximately $125,000 each
to drill and complete.

     West Texas.  The Company believes it can enhance the value of selected West
Texas  fields  through  in-fill  drilling and enhanced  recovery  projects.  The
Company  plans to  utilize  its  management  experience  to  conduct a number of
waterflood  projects primarily in West Texas fields.  While waterflood  projects
typically take a longer period of time to respond to fluid injection as compared
to production rates of new wells drilled, the West Texas properties have in-fill
drilling potential that could result in a somewhat faster increase in production
and cash flow. The Company presently plans to spend  approximately $7 million on
development drilling and waterflood projects in West Texas during 1997.

     o Fargo West. The Company, as operator, owns a 95% working interest in this
property  located in the Fargo  West  Field.  This  property  produces  from the
6,200-foot deep Strawn  Formation in Wilbarger County in West Texas. By recently
conducting  fracture  simulation  ("frac")  work on five wells,  the Company was
successful at more than doubling the property's production to over 4,400 Bbls of
oil per month.  The Company plans to drill from four to ten additional  wells at
Fargo West, with one extension well and three in-fill wells to be drilled during
1997 at an approximate cost of $250,000 per well.

     o Chinquapin  Strawn. The Company,  as operator,  owns an approximately 70%
working  interest in a property in the Chinquapin  Strawn Field,  which produces
from the  5,300-foot  deep Strawn  Formation in Nolan County in West Texas.  The
Company has drilled  three wells on the  Chinquapin  Strawn  property to date in
1997. A total of nine more wells are planned for this property,  with three of
such wells to be drilled in 1997 at an approximate cost of $250,000 per well.

     o Jameson.  The Jameson  Field  property,  in which the Company owns a 100%
working  interest  and is operator,  produces  from the  6,000-foot  deep Strawn
Formation in Coke County in West Texas. The Company has drilled one in-fill well
on the Jameson  property to date in 1997.  The Company plans to drill a total of
12 additional wells on this property,  with three or four wells to be drilled in
1997 at an approximate cost of $250,000 per well.

     o McFarland. The Company owns a 25% working interest in the McFarland Field
property,  a waterflood  project which  produces  from the 4800-foot  deep Queen
Formation  in Andrews  County in West Texas.  The property is operated by Mariah
Energy  Corporation,  which drilled one well there in 1996 and plans to drill up
to six  wells  during  1997  and a total  of up to  eleven  additional  wells in
subsequent  years to fully develop the property.  The approximate  total cost of
each well is estimated at $225,000.

     o Levelland.  The Company, as operator,  owns a 95% working interest in the
Levelland Field property, a waterflood project which produces from the 5000-foot
deep San Andres Formation
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     in Cochran  County in West Texas.  Although the Company has not yet drilled
any  wells on this  property,  it plans to drill up to ten  wells in 1997 and 29
additional wells thereafter at an approximate cost of $225,000 per well.

     o Starnes.  The Company,  as operator,  owns a 100% working interest in the
Starnes property, which is also located in the Levelland Field and produces from
the San Andres  Formation in West Texas.  The Company plans to drill its initial
two wells in this  waterflood  project in 1997,  with a total of four additional
wells being planned at an approximate cost of $225,000 each.

     Austin  Chalk.   Management   believes  that  horizontal  drilling  can  be
successfully used to augment the value of the Company's properties in the Austin
Chalk  Formation  of Central  Texas,  an area where  wells  typically  have high
initial  rates of  production.  The Company owns a 25% working  interest in (38)
producing  wells on  approximately  12,000  lease acres in Fayette and  Gonzales
Counties.  The Company drilled one lateral well in the Austin Chalk formation in
1996,  which  was  successfully  completed  as an oil well.  Geological  studies
indicate  the  potential  for as many as 20 new lateral  locations to be drilled
from  existing  bore holes into  undrained  areas on the lease  block.  Drilling
laterally from existing bore holes is advantageous, as the cost is approximately
one-third of the expenditure  required for a new "grass roots" well. The Company
plans to drill two lateral  wells on its Austin Chalk  properties  in 1997 at an
approximate cost of $400,000 per well to the 100% working interest.

         Exploratory Drilling

         The Company has adopted a "controlled risk" approach to its exploratory
drilling  activity by  concentrating  in specific  regions in the United  States
(primarily   Oklahoma  and  Texas)  where  the  Company's  technical  staff  has
considerable experience, or which are near proved producing properties where the
potential for significant  reserves exists. To the extent feasible,  the Company
reduces its  exploration  risk by  diversifying  through  investment in multiple
prospects,  by farming out (promoting out) interests to industry partners and by
utilizing 3-D seismic surveys and other advanced technologies.

     The Company has  successfully  completed four out of the eight  exploration
wells it has drilled since January 1995.  The  exploratory  wells drilled by the
Company have ranged in cost from  $75,000 to $500,000 on a dry hole basis,  with
an average dry hole cost of  approximately  $150,000  each. The Company plans to
spend  approximately  $3  million  out of its $15  million  drilling  budget  on
exploratory drilling during 1997.

     The Company and its partners are presently  drilling two exploratory wells,
a  potential  gas  well in the  Douglas  Formation  in  Western  Oklahoma  and a
prospective oil well in the Austin Chalk Formation in Central Texas.  The latter
well is the  Company's  first  exploratory  horizontal  well and the  Company is
presently  drilling at a depth of 9,000 feet. The Company's working interests in
these two wells are 25% and 20%, respectively.

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     Four or five  additional  exploratory  wells are planned by the Company for
drilling in 1997. These include a prospective shallow gas well in Frio County in
Southwest  Texas, a possible oil and gas well to be determined by 3-D seismic in
Victoria County on the Texas Gulf Coast and two or three other potential oil and
gas  wells  on the  Texas  Gulf  Coast.  The  Company  is also  reviewing  other
exploration opportunities.

Gathering and Processing of Natural Gas

     Hunter Gas Gathering,  Inc., a wholly owned subsidiary of the Company, owns
and  operates  four  gas  gathering  systems  located  in  Oklahoma,  Texas  and
Louisiana,  none of which  are  subject  to  regulation  by the  Federal  Energy
Regulatory Commission ("FERC"), and a 50% ownership interest in a gas processing
plant  knows as the  McLean  Gas  Plant in the Texas  Panhandle.  Two of the gas
gathering  systems,  Panoma and North Appleby,  account for more than 40% of the
throughput utilization from the Company's four systems.

     Generally,  the  gathering  systems  transport  the natural gas to a common
point where it is dehydrated  prior to redelivery  to downstream  pipelines.  In
managing  its gas  gathering  systems,  the  Company  has  emphasized  operating
efficiency  and overhead  management  and  introduced  a third party  compressor
congract program which ties throughput costs to volume  transported  rather than
to compression  capacity.  The Company  believes that its focus on  volume-based
pricing  reduces  the  potential   financial  impact  of  a  decline  in  actual
throughput.

     The Panoma system, the largest of the Company's four gas gathering systems,
consists of approximately  427 total miles of pipeline.  The main trunklines run
east to west for  approximately  66 miles with the east end  starting in Beckham
County, Oklahoma and the west end starting in Gray County, Texas. The Panoma gas
gathering  system  currently  delivers  gas to El Paso  Natural  Gas Company for
transport  to markets in  Western  Oklahoma  and the West  Coast,  although  the
Company is actively seeking  additional markets for such gas. Gas throughput for
the Panoma  gathering  system is  approximately  16.5 MMcf per day. The Company,
which owns  approximately  469 of the roughly 500 wells  connected to the Panoma
system,  is also  actively  looking  to add new  wells  to such  system  through
acquisition or development.

         The Company's North Appleby gas gathering  system is located  primarily
in Nacogdoches County in East Texas. Approximately 39 wells are connected to the
system,  which  delivers  approximately  3.0 MMcf per day for third  parties  to
Natural Gas Pipeline Co. for  transportation  to other  markets.  The  Company's
other two systems  deliver an  aggregate  of 1.5 MMcf per day for third  parties
from 66 wells into various markets.

     Effective  January 1, 1997, Hunter Gas Gathering,  Inc.  purchased for $2.5
million a 50%  ownership  interest in the McLean Gas Plant,  the gas  processing
facility  connected to the Company's Panoma gas gathering  system.  The purchase
also included a 23-mile  products  pipeline between the McLean Gas Plant and the
Koch  Pipeline  at  Lefors,  Texas and all gas and  product  purchase  and sales
agreements  related to the plant. The McLean Gas Plant is a modern cryogenic gas
processing plant

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     with a capacity of 23.0 MMcf per day. The Company is  currently  processing
approximately 1000 Bbls of natural gas liquids per day (a plant utilization rate
of 16.5 MMcf per day).  The Company  acquired its 50% ownership  interest in the
plant from  Carrera  Gas  Company,  L.L.C.  of Tulsa,  Oklahoma,  which owns the
remaining 50% of the plant and has remained as operator of the  facility.  Under
terms of the Company's agreement with Carrera,  the Company receives 100% of the
net profits from the McLean Gas Plant until it recoups the $2.5 million purchase
price, at which point profits are thereafter divided equally between the Company
and Carrera.

Marketing of Production

         Hunter Gas Gathering,  Inc., a wholly owned  subsidiary of the Company,
markets all of the Company's gas production.

     The Company sells its gas production as well as gas it purchases from third
parties  to gas  marketing  firms or end users  either  on the spot  market on a
month-to-month  basis at prevailing  spot market prices or at negotiated  prices
under  long-term  contracts  based on current spot market prices.  The Company's
historic  ability to produce or purchase gas at a somewhat lower price than that
at which  it is  resold  has  enabled  the  Company  to  profit  from the  price
differential, however, the marketing of gas for its own account also exposes the
Company to the attendant commodities risk. Hunter Gas Gathering,  Inc. currently
sells the majority of its gas to Crosstex Energy Services,  a gas marketing firm
located in Dallas,  Texas formed in January 1997 when Comstock Natural Gas, Inc.
sold its gas  gathering,  processing  and  marketing  operations.  Although  the
Company  sold  approximately  91% of its gas to  Comstock in 1996 and has sold a
comparable  percentage to Crosstex to date in 1997, the Company does not believe
that any  discontinuation  of such sales  arrangement would be disruptive to the
Company's gas marketing  operations.  The Company  typically  obtains letters of
credit  guaranteeing  the payment of the purchase price for its gas. At December
31, 1996, the Company had hedged  two-thirds of the gas produced from the Panoma
Properties.  The  Company's  two  gas  hedges,  each  of  which  covers  100,000
MMBtu/month  for the period  February 1997 though January 1998, are at prices of
$1.77 per MMBtu and $1.905 per MMBtu and $2.00 and $2.15 per Mcf, respectively.

     The Company's oil is sold by Magnum Hunter Production, Inc. typically under
month-to-month contracts with a variety of crude oil purchasers.  Oil is usually
sold for the Company's own account through Enmark,  a marketing agent in Dallas,
Texas.  While the Company has historically been able to sell oil at above posted
prices,  it is also  exposed to the  commodities  risk  inherent  in  short-term
contracts.  Based on fourth quarter 1996  production,  approximately  85% of the
Company's oil is hedged under a price collar whereby  settlement  only occurs if
between March 1997 and August 1997,  the average  monthly  closing price for oil
falls outside its $20.00 minimum and $25.10 maximum amount of the collar.




                                       10

<PAGE>



The following table provides summary  operating data with respect to production,
sales prices, costs, and the resulting gross margins for the periods indicated:
<TABLE>
<CAPTION>


                                                                   Year Ended December 31,
                                                                1996            1995        1994
<S>
Production                                             <C>                 <C>           <C>
  Oil (MBbl).......................................             191             30               42
  Gas (MMcf).......................................           2,675            102               88
  Mmcfe............................................           3,821            282              340
Average sales price
  Oil (per Bbl)....................................        $  20.46        $ 15.60        $   14.20
  Gas (per Mcf)....................................            2.37           1.46             1.53
  Mcfe.............................................            2.68           2.19             2.15
Average operating cost per Mcfe....................        $   1.15        $   .95        $     .94
Gross margin per Mcfe..............................        $   1.53        $  1.24        $    1.21

</TABLE>
         The market for oil and natural gas  produced by the Company  depends on
factors  beyond its control,  including  the extent of domestic  production  and
imports of oil and  natural  gas,  the  proximity  and  capacity  of natural gas
pipelines  and other  transportation  facilities,  weather,  demand  for oil and
natural gas, the  marketing  of  competitive  fuels and the effects of state and
federal  regulation.  The oil and natural gas industry  also competes with other
industries  in  supplying  the  energy  and  fuel  requirements  of  industrial,
commercial and individual consumers.

Petroleum Management and Consulting Services; Possible Foreign Drilling

     Gruy. The Company  acquired Gruy Pertroleum  Management Co.("Gruy") in the
Magnum  Hunter  Combination  in  December  1995.  Gruy has a 37-year  history of
managing   properties  for  third  parties,   which  include  banks,   financial
institutions,  bankruptcy trustees,  estates,  individual investors,  trusts and
independent oil and gas companies. Gruy provides drilling,  completion and other
well-site services;  advice regarding certain regulatory compliance regulations;
receipt and  disbursement  functions and other  managerial  services;  petroleum
engineering  services;  and  consultation  as an expert  witness.  Gruy manages,
operates  and  provides  consulting  services on oil and natural gas  properties
located in Texas, Oklahoma, Mississippi,  Louisiana, New Mexico and Kansas. Gruy
is an important component of the Company's  acquisition program. As the operator
of wells for third  parties and as a provider  of  consulting  services  for the
energy  industry,   Gruy  is  often  able  to  identify  attractive  acquisition
opportunities.

     Hunter Butcher.  The Company provides  consulting services to several Latin
American energy companies through Hunter Butcher  International L.L.C.  ("Hunter
Butcher"),  a 51% owned  subsidiary.  Hunter  Butcher has  primarily  focused on
assisting energy-related Mexican companies in obtaining financing for their U.S.
purchases of products and  services for export to Mexico.  This is  accomplished
through a commercial  bank credit facility  established to facilitate  short and
medium term credit for Hunter Butcher to purchase these products and resell them
to its clients at a slight  premium.  The credit risk to Hunter  Butcher on such
resales is lessened by partial guaranties of

                                       11

<PAGE>



     approximately  85% to 90% of such  borrowings  by the Export Import Bank of
the United States (the "ExIm Bank"), by credit insurance and through deposits by
Hunter Butcher's clients to secure the unguaranteed  portion of the indebtedness
and certain  interest.  Hunter Butcher could,  however,  incur a loss under such
arrangement  in  repaying  indebtedness  under  the  credit  facility  since the
applicable  ExIm Bank guaranty and deposit would not be adequate to pay interest
under the credit facility at the default rate or cover other possible losses. In
addition,  the  Company  itself may choose  from time to time to  guarantee  the
indebtedness  incurred  under the  credit  facility  by Hunter  Butcher  for the
ultimate  benefit  of its  clients.  In 1996,  the  Company's  share  of  Hunter
Butcher's net revenues was approximately $18,000.

     Possible Participation in Foreign Energy Related Activities. As the Company
continues  to increase its asset base,  management  plans to expand the scope of
its oil and gas activities,  including the Company's  possible  participation in
foreign  energy  projects.  The  Company  believes  that  Latin  America  offers
significantly  greater  hydrocarbon reserve potential with less competition than
in the United States.  Therefore,  as part of its long-term growth strategy, the
Company  periodically   reviews  energy  related  investment   opportunities  in
Argentina,  Bolivia,  Guatemala,  Mexico,  Peru  and  other  countries  in Latin
America. Although no investment has been made to date, the Company is exposed to
some of these opportunities through relationships established by Hunter Butcher.

     In expanding into Mexico,  Central  America or South  America,  the Company
anticipates  that any investment  would be made in partnership  with one or more
partners either locally or through parties with whom it had previously worked in
the United States. In pursuing international opportunities,  the Company intends
to adhere to its philosophy of primarily focusing on proved producing properties
that it perceives to be reasonably  priced and that afford the  opportunity  for
significant   enhancement  of  value  through   appropriate   exploitation   and
development activities utilizing its management expertise.

Competition

         The oil and gas  industry  is highly  competitive.  Competitors  of the
Company  include  major oil  companies,  other  independent  oil and natural gas
concerns,   and  individual   producers  and  operators,   many  of  which  have
substantially  greater financial resources and larger staffs and facilities than
those of the Company. In addition, the Company frequently encounters competition
in the acquisition of oil and natural gas properties and gas gathering  systems,
and  in  its  management  and  consulting  business.   The  principal  means  of
competition  are  the  amount  and  terms  of the  consideration  offered.  When
possible,  the Company tries to avoid open  competitive  bidding for acquisition
opportunities.  The principal  means of competition  with respect to the sale of
oil and natural gas production are product  availability and price. The price at
which the  Company's  natural gas may be sold will  continue to be affected by a
number of factors,  including the price of alternate  fuels such as oil and coal
and  competition  among various  natural gas producers and marketers.


                                       12

<PAGE>



Regulation

         Federal Regulation of Sales of Natural Gas

         Historically,  the transportation and sale for resale of natural gas in
interstate  commerce have been regulated pursuant to the Natural Gas Act of 1938
(the  "NGA").  In  addition,  since  1978,  maximum  selling  prices of  certain
categories of gas, whether sold in interstate or intrastate commerce,  have been
regulated  pursuant to the Natural  Gas Policy Act of 1978 (the  "NGPA").  These
statutes  are  administered  by the  FERC.  The  provisions  of  these  acts and
regulations  are complex.  However,  as a result of the enactment of the Natural
Gas  Wellhead  Decontrol  Act of  1989  (the  "Decontrol  Act"),  the  remaining
restrictions  imposed  on the NGA and the NGPA with  respect  to  "first  sales"
terminate on the earlier of January 1, 1993 or the  expiration of the applicable
contract. Any natural gas not otherwise deregulated prior to January 1, 1993 was
deregulated  as of that date.  The effect of the  Decontrol Act is to remove all
remaining  price  controls  under  the NGPA and to  remove  all  remaining  FERC
certificate and abandonment jurisdiction otherwise applicable to producers under
the NGA.

         Several major regulatory changes have been implemented by the FERC from
1985 to the  present  that  affect  the  economics  of natural  gas  production,
transportation  and  sales.  In  addition,  the  FERC  continues  to  promulgate
revisions  to  various  aspects  of the rules and  regulations  affecting  those
segments  of the  natural  gas  industry  which  remain  subject  to the  FERC's
jurisdiction.  The  stated  purpose  of many of these  regulatory  changes is to
promote competition among the various sectors of the gas industry.  The ultimate
impact of the complex and overlapping  rules and regulations  issued by the FERC
since 1985 cannot be predicted.  In addition,  many aspects of these  regulatory
developments have not become final but are still pending judicial and FERC final
decisions.

         FERC has issued  Orders 636 and 636-A for the purpose of  restructuring
gas pipeline sales and  transportation  services in the United States to promote
competition  in all phases of the gas industry.  The impact of these FERC Orders
has  significantly  altered  the  traditional  way  natural  gas was  purchased,
transported, and sold. The restructuring requirements that have emerged from the
administrative and judicial review process have varied  significantly from those
previously in effect.

         Environmental Regulation

         The  Company's  exploration,  development  and  production  of oil  and
natural  gas  operations  are  subject  to  various  federal,  state  and  local
environmental  laws and regulations.  Such laws and regulations can increase the
costs of  planning,  designing,  installing  and  operating  oil and natural gas
wells. For example, the Company's domestic activities are potentially subject to
the regulations promulgated by the Environmental Protection Agency ("EPA") under
the Oil  Pollution  Act of 1990  ("OPA"),  the  Clean  Water  Act  ("CWA"),  the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act

                                       13

<PAGE>



("RCRA"),  and  the  Clean  Air  Act  ("CAA"),  as  well  as  state  regulations
promulgated under comparable state statutes.

         Under the OPA, in a limited set of circumstances, a release of oil into
the  waters  of the  United  States  could  result  in the  Company  being  held
responsible for the costs of remediating  such a release,  certain OPA specified
damages suffered by private parties, and natural resource damages recoverable by
federal,  state, or foreign  governments  and Indian tribes.  The extent of that
liability  could  range from  $500,000  to either  $350  million or all costs of
remediation  plus $75  million,  depending  on the  nature of the  release.  Any
limitation on such financial  liability would be lost if a release were found to
be caused by gross  negligence,  willful  misconduct  or violation of applicable
regulations.

         Pursuant  to the CWA, a release of oil in harmful  quantities  into the
waters of the United States could, in certain limited  circumstances,  result in
the  Company  being  held  responsible  for the  actual  costs  of  remediation.
Depending on the nature of the release, such liability could range from $125,000
to $50 million.  A finding of willful  misconduct  or willful  negligence  would
cause  a loss  of the  limits  on  liability  under  the  CWA.  Furthermore,  in
appropriate  circumstances  significant  civil penalties ranging from $25,000 to
$100,000 per day of violation, or $1,000 to $3,000 per barrel of oil discharged,
and significant  criminal fines could be imposed on the Company for a release of
harmful quantities of oil to those waters identified in the CWA.

         CERCLA and comparable state statutes,  also known as "Superfund"  laws,
impose joint and several  liability,  without regard to fault or the legality of
the  original  conduct,  on  certain  classes of  persons  for the  release of a
"hazardous substances" into the environment.  These persons include the owner or
operator of a site, and companies that transport,  dispose of or arrange for the
disposal of, the hazardous  substances found at the site. CERCLA also authorizes
the EPA, and in some cases, third parties to take actions in response to threats
to the public health or the  environment and to seek to recover from the classes
of  responsible  persons  the costs they  incur.  Although  CERCLA,  as amended,
currently  exempts  crude oil,  natural gas and  natural  gas  liquids  from the
definition of hazardous substance,  the Company's operations may involve the use
or handling of other  materials  that may be classified as non-exempt  hazardous
substances  or  hazardous  wastes  under  CERCLA.  Furthermore,  there can be no
assurance that the exemption will be preserved in future  amendments of the act,
if any, or that more stringent laws and  regulations  protecting the environment
will not be adopted.

         RCRA and its comparable state and local  requirements  impose standards
for  the   transportation,   treatment  and  disposal  of  both   hazardous  and
nonhazardous  solid  wastes.  The EPA is currently  considering  the adoption of
stricter disposal  standards for nonhazardous  waste.  Further,  legislation has
been  proposed in Congress from time to time that would  reclassify  certain oil
and gas  wastes,  including  wastes  generated  during  pipeline,  drilling  and
production  operations,  as "hazardous  wastes" under RCRA which would make such
solid wastes subject to much more stringent handling,  transportation,  storage,
disposal and clean-up requirements. This development could have a

                                       14

<PAGE>



significant  impact on the  Company's  operating  costs.  State  initiatives  to
further regulate oil and natural gas wastes could have a similar impact.

         The  Company's  operations  may also be  subject  to the  Clean Air Act
("CAA") and comparable state and local requirements.  Amendments to the CAA were
adopted in 1990 and contain  provisions that may require certain oil and natural
gas related  installations to obtain federally enforceable operating permits and
may require the monitoring of emissions.

         It is not  anticipated  that the  Company  will be required in the near
future to expend  amounts  that are  material in  relation to its total  capital
expenditures  program  by  reason of  environmental  laws and  regulations,  but
inasmuch as such laws and  regulations  are frequently  changed,  the Company is
unable to  predict  the  ultimate  cost of  compliance.  The  Company is able to
control  directly  the  operations  of only  those  wells  for  which it acts as
operator.  Notwithstanding  the Company's lack of control over wells operated by
others,  the failure of the  operator to comply  with  applicable  environmental
regulations may, in certain circumstances, be attributable to the Company.

         State Regulation

         State statutes and regulations require permits for drilling operations,
drilling bonds and reports concerning operations. The Railroad Commission of the
State of Texas  regulates the  production of oil and natural gas produced by the
Company in Texas.  Similar  regulations are in effect in all states in which the
Company  produces oil and natural gas. Most states in which the Company owns and
operates properties have statutes,  rules or regulations governing  conservation
matters, including the unitization or pooling of oil and natural gas properties,
establishing  of maximum rates or production  from oil and natural gas wells and
the spacing of such wells.  Many states also  restrict  production to the market
demand for oil and natural gas. Such statutes and regulations may limit the rate
at which oil and natural gas could  otherwise  be  produced  from the  Company's
properties.  Some states have enacted  statutes  prescribing  ceiling prices for
natural gas sold within their state.

     The Company owns and operates  saltwater disposal and injection wells which
are subject to state regulations. Through its subsidiaries, the Company owns ten
saltwater  disposal  wells located in Oklahoma and Texas.  One of these wells is
currently inactive. Only one of the ten disposal wells is a commercial well, the
other nine wells are used for  disposal of waters from Company  operations.  The
commercial  disposal well is located in Cushing,  Oklahoma and is for sale. This
well is permitted to accept only non-hazardous produced waters.

         The  Company  also  owns,   through  its  subsidiaries,   approximately
seventeen  saltwater  injection  wells.  These wells are located in Oklahoma and
Texas. Only four of the  approximately  seventeen wells are currently being used
by the Company.

     The operations of the Company's disposal and injection wells are subject to
regulatory oversight by the Corporation  Commission in Oklahoma and the Railroad
Commission of Texas. In

                                       15

<PAGE>



addition, the Company has one injection well located on Indian lands in Oklahoma
which also is subject to oversight by the Environmental  Protection  Agency. The
regulatory  scheme includes  regulations  adopted  pursuant to the Safe Drinking
Water Act and similar  state laws and  regulations.  These laws and  regulations
establish  construction,   permitting,   operating,   monitoring  and  reporting
requirements for disposal and injection wells. To the Company's  knowledge,  its
wells are in compliance with all applicable regulations.

         Several   states  have  also  adopted   regulations  on  the  handling,
transportation,   storage,  and  disposal  of  naturally  occurring  radioactive
materials that are found in oil and natural gas operations.

Employees

     At December 31, 1996, the Company had thirty-seven (37) full-time employees
of which six (6) were management, thirteen (13) were administrative and eighteen
(18) were field employees.  None of the Company's employees are represented by a
union. Management considers its relations with employees to be good. The Company
anticipates  hiring  approximately  nine (9) additional  employees  assuming the
Permian Basin Acquisition closes as expected.

Facilities

         The Company occupies approximately 9,590 square feet of office space at
600 East Las Colinas Boulevard,  Suite 1200,  Irving,  Texas, under a lease that
expires in November 2001. The Company owns a field office and production yard in
Shamrock, Texas, consisting of approximately four (4)acres of land.

Item 2.           Description of Properties

Oil and Natural Gas Reserves

     All  information  set forth herein  regarding  estimated  proved  reserves,
related estimated future net revenues and present value of the Company's oil and
gas interests is taken from reports prepared by Gaffney, Cline & Associates Inc.
and Glenn Harrison  Petroleum  Consultants,  Inc.,  both  independent  petroleum
engineers in Dallas,  Texas.  These estimates have been prepared with respect to
the Company's interests as of December 31, 1996 and December 31, 1995 and by the
respective  engineers named in the footnotes below the tables.  The estimates of
these independent petroleum engineers were based upon their review of production
histories  and  other  geological,  economic,  ownership  and  engineering  data
provided by the Company an independent sources.

         In accordance with SEC guidelines, the estimates of future net revenues
from proved reserves and the present value of proved reserves are made using oil
and natural gas sales prices in effect as of the dates of such estimates and are
held  constant  throughout  the life of the  properties.  The  Company's  proved
reserves at December 31, 1996 were estimated based upon weighted  average prices
(before  deduction  of  production  taxes) of $4.00 per Mcf of natural  gas and
$24.31 per Bbl

                                       16

<PAGE>



     of oil,  compared to $1.46 per Mcf of natural gas and $15.60 per Bbl of oil
as of December  31,  1995.  Operating  costs and  development  costs and certain
production-related  taxes were deducted in arriving at the estimated  future net
revenues.  No provision was made for income  taxes.  The estimates of future net
revenues and their  present  value differ in this respect from the  standardized
measure  of  discounted  future  net cash  flows  set  forth in the Notes to the
Consolidated  Financial  Statements of the Company,  which is  calculated  after
provision  for  future  income  taxes.  There  can be no  assurance  that  these
estimates  are  accurate  predictions  of future net  revenues  from oil and gas
reserves  or their  present  value.  Also,  prices for  natural gas and oil have
decreased since December 31, 1996 to $2.30 per Mcf of natural gas (assuming 1200
BTU gas) and  $20.41 per Bbl of oil as of March 31,  1997,  which  would have a
significant effect on the proved discounted value of reserves.

     Proved  reserves  are  estimates  of  hydrocarbons  to be  recovered in the
future. Reservoir engineering is a subjective process of estimating the sizes of
underground  accumulations  of oil and natural gas that cannot be measured in an
exact way. The accuracy of any reserve  estimate is a function of the quality of
available data and of engineering  and geological  interpretation  and judgment.
Reserve  reports of other  engineers  might  differ from the  reports  contained
herein.  Results of drilling,  testing, and production subsequent to the date of
the estimate may justify  revision of such estimate.  Future prices received for
the sale of oil and natural gas may be  different  from those used in  preparing
these reports.  The amounts and timing of future operating and development costs
may also  differ  from those  used.  Accordingly,  reserve  estimates  are often
different  from the  quantities  of oil and  natural  gas  that  are  ultimately
recovered.



















                                       17
<PAGE>

         The following tables set forth the estimated proved reserves of oil and
natural gas of the Company  and the present  value  thereof for the two years in
the periods ended December 31, 1996 and December 31, 1995:

                Estimated Proved Oil and Natural Gas Reserves(1)
<TABLE>
<CAPTION>

                                                   1996 (2)             1995 (3)
<S>                                               <C>                 <C>
Net natural gas reserves (MMcf):

  Proved developed producing...............       71,166,555          8,796,748
  Proved developed nonproducing............          108,586               -
  Proved undeveloped.......................        9,290,856          5,275,168
                                                  -----------------------------
     Total proved natural gas reserves.....       90,565,997         14,071,916
                                                  =============================

Net oil reserves (Bbl):

  Proved developed.........................       1,849,846           1,681,841
  Proved developed nonproducing............         112,338               -
  Proved undeveloped.......................       3,376,071           2,085,898
                                                 ------------------------------
     Total proved oil reserves.............       5,338,255           3,767,739
Total proved reserves (Mcfe)(4)............     122,595,527          36,678,350
                                                ===============================


                  Estimated Present Value of Proved Reserves(1)

                                                     1996                 1995
Estimated Present Value:

  Proved developed producing...............  $  115,858,134      $    19,036,205
  Proved developed nonproducing............         664,308                -
  Proved undeveloped.......................      48,244,017           18,173,125
                                             -----------------------------------
     Total proved reserves.................  $  164,766,459      $    37,209,330
                                             ===================================

     (1) Based upon reserve  reports at December 31, 1996 and 1995,  prepared by
         independent  petroleum  consultants,  James J.  Weisman,  Jr.,  Gaffney
         Cline & Associates and Glenn Harrison Petroleum Consultants,  Inc., all
         of Dallas Texas.
     (2) Includes reserves acquired in the Panoma Acquisition.
     (3) Includes  reserves  acquired  in the Magnum  Hunter  Combination.
     (4) Mcfe is the Mcf equivalent of oil and gas and is computed as follows:
         Bbls of oil times six (6) plus Mcf of natural gas.
</TABLE>

                                       18

<PAGE>



Drilling Activity

         The following  table sets forth the results of the  Company's  drilling
activities during the two fiscal years ended December 31, 1996.
<TABLE>
<CAPTION>

                                               Gross Wells(1)                                   Net Wells(2)
    Year         Type of Well       Total       Producing(3)       Dry(4)           Total      Producing(3)       Dry(4)
<S>                                <C>         <C>                 <C>              <C>        <C>                <C>
    1996       Exploratory
                 Texas                8                4               4              5.23               2.63          2.60
                 Oklahoma             0                0               0               0                 0             0
                 Other                0                0               0               0                 0             0
               Development
                 Texas               2                 2               0               .35                .35          0
                 Oklahoma            1                 1               0               .31                .31          0
                 Other               0                 0               0               0                 0             0
     1995       Exploratory
                 Texas                1                1              0                .30                .30          0
                 Oklahoma             1                1              0                .25                .25          0
                 Other                0                0              0                0                 0             0
               Development
                 Texas                0                0              0                0                 0             0
                 Oklahoma             0                0              0                0                 0             0
                 Other                0                0              0                0                 0             0

</TABLE>


(1)      A gross well is a well in which a working interest is owned. The number
         of gross wells is the total number of wells in which a working interest
         is owned.  Fluid  injection  wells for  waterflood  and other  enhanced
         recovery projects are not included as gross wells.

(2)      A net well is  deemed  to exist  when the sum of  fractional  ownership
         working interests in gross wells equals one. The number of net wells is
         the sum of fractional  working interests owned in gross wells expressed
         as whole numbers and fractions thereof.

(3)      A producing  well is an  exploratory  or  development  well found to be
         capable of producing either oil or natural gas in sufficient quantities
         to justify completion as an oil or natural gas well.

(4)      A dry well is an  exploratory  or  development  well that is not a 
         producing well.



                                       19

<PAGE>



Oil and Gas Wells

         The following  table sets forth the number of oil and natural gas wells
in which the Company had a working  interest at December 31, 1996.  All of these
wells are located in the United States.
<TABLE>
<CAPTION>


                                                                   Productive Wells
                                                                As of December 31, 1996
                                               Gross(1)                                         Net(2)
Location                          Oil            Gas             Total            Oil             Gas             Total
<S>                               <C>          <C>               <C>              <C>           <C>               <C>
Texas......................        113             447             560            53.35          381.72          435.07
Oklahoma...................         26             117             143            21.85          103.09          124.94
Mississippi................          4               0               4             2.98               0            2.98
New Mexico.................          3               3               6             2.48             .64            3.12
California.................         14               0              14             1.05               0            1.05
Kansas.....................          2               0               2             1.90               0            1.90
                                   162             567             729            83.61          485.45          569.06

</TABLE>


(1)      A gross well is a well in which a working interest is owned. The number
         of gross wells is the total number of wells in which a working interest
         is owned.

(2)      A net well is  deemed  to exist  when the sum of  fractional  ownership
         working interests in gross wells equals one. The number of net wells is
         the sum of fractional  working interests owned in gross wells expressed
         as whole numbers and fractions thereof.

Oil and Natural Gas Acreage

         The following table summarizes the Company's  developed and undeveloped
leasehold acreage at December 31, 1996.

<TABLE>
<CAPTION>

                                                     Developed                                Undeveloped
                                          Gross(1)               Net(2)              Gross(1)              Net(2)
<S>                                       <C>                    <C>                 <C>                   <C>
Texas..............................       167,216               151,293               10,432                4,711
Oklahoma...........................        45,610                42,982                   --                   --
Mississippi........................           528                   452                   --                   --
New Mexico.........................           840                   702                   --                   --
California.........................           509                    38                   --                   --
Kansas.............................            80                    69                   --                   --
</TABLE>


(1)      A gross  acre is an acre in which a  working  interest  is  owned.  The
         number of gross  acres is the total  number of acres in which a working
         interest is owned.

(2)      A net acre is  deemed  to exist  when the sum of  fractional  ownership
         working interests in gross acres equals one. The number of net acres is
         the sum of fractional  working interests owned in gross acres expressed
         as whole numbers and fractions thereof.

                                       20

<PAGE>

         As is customary in the industry, the Company generally acquires oil and
natural gas acreage  without any  warranty of title except as to claims made by,
through or under the  transferor.  Although the Company has title examined prior
to  acquisition  of  developed  acreage  in those  cases in which  the  economic
significance of the acreage  justifies the cost,  there can be no assurance that
losses will not result from title  defects or from defects in the  assignment of
leasehold  rights.  In many instances,  title opinions may not be obtained if in
the Company's judgment, it would be uneconomical or impractical to do so.

Item 3.           Legal Proceedings.

No  legal  proceedings  are  pending  other  than  ordinary  routine  litigation
incidental to the Company's business.


Item 4.           Submission of Matters to a Vote of Security Holders.

         The Company had no matters  requiring a vote of security holders during
the fourth quarter of 1996.

                                       21

<PAGE>



                                     PART II


Item 5.           Market for Common Equity and Related Stockholder Matters.

     The Common Stock has been listed on the American Stock Exchange since March
8, 1996.  The Common Stock has been listed  under the ticker  symbol "MHR" since
March 18, 1997, prior to which time it was listed under the ticker symbol "MPM."
Prior to March 8,  1996,  the  Common  Stock was  listed on the  American  Stock
Exchange  Emerging  Company  Marketplace.  At March 15,  1997,  there were 3,797
stockholders of record.

<TABLE>
<CAPTION>

                                                                                                      Average Daily
                                                                                                     Trading Volume
                                                                    High               Low              (Shares)
<S>                                                                <C>                 <C>               <C>

1996
  First Quarter.............................................       $ 3 11/16       $     2 5/8           16,154
  Second Quarter............................................          4 3/4              3               39,096
  Third Quarter.............................................          4 7/8              3 1/2           18,371
  Fourth Quarter............................................          5 1/4              4 1/8           34,982

1995
  First Quarter.............................................       $  5            $     2 7/8           24,716
  Second Quarter............................................          4 11/16            3 3/8            8,624
  Third Quarter.............................................          4 3/4              3 5/16          15,731
  Fourth Quarter............................................          4 1/4              2 3/4           13,000

1994
  First Quarter.............................................       $  3 3/8         $    2 1/2              277
  Second Quarter............................................          5 1/4              2 3/16           1,829
  Third Quarter.............................................          3 5/8              2 7/8            3,660
  Fourth Quarter............................................          4 5/16             3 1/4           13,911


</TABLE>
     On March 25, 1997,  the last reported  sale price of the  Company's  Common
Stock on the American Stock Exchange was $5 15/16 per share.

     The Company has not previously  paid any cash dividends on its Common Stock
and does not anticipate  paying dividends on its Common Stock in the foreseeable
future. It is the present intention of management to utilize all available funds
for the development of the Company's  business  activities.  The Company may not
pay any  dividends  on Common  Stock  unless  and until all  dividend  rights on
outstanding  Preferred Stock have been  satisfied.  The Existing Credit Facility
restricts,  and it is expected  that the New Credit  Facility will also restrict
the payment of cash dividends on the Company's securities.

                                       22

<PAGE>




Item 6.  Management's Discussion and Analysis or Plan of Operation

     The following  discussion and analysis  should be read in conjunction  with
the Company's  consolidated  financial  statements and the notes associated with
them contained elsewhere in this report. This discussion should not be construed
to imply that the results  discussed herein will  necessarily  continue into the
future or that any conclusion  reached herein will  necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of management of the Company.

On July 21,  1995,  the Company  closed a  definitive  agreement to combine (the
"Business  Combination")  with Hunter  Resources,  Inc.  ("Hunter"),  subject to
Hunter shareholder approval.  Pursuant to the definitive agreement,  the Company
issued to Hunter  2,750,000  shares of newly issued  restricted  common stock in
exchange  for  substantially  all  of  the  assets  of  Hunter,  subject  to its
associated  liabilities.   Hunter's  assets  primarily  consisted  of  stock  in
wholly-owned  subsidiaries  and stock ownership  interests in limited  liability
companies ("Hunter Subsidiaries").

     On December  19, 1995 to be effective  December  22, 1995,  the Company and
Hunter  entered  into an  Agreement  and  Plan  of  Reorganization  and  Plan of
Liquidation, as amended. The Amended Agreement was executed on December 19, 1995
by Hunter  shareholders  holding over fifty percent (50%) of the common stock of
Hunter and provided for the issuance to Hunter of an additional 2,335,077 shares
of newly issued restricted common stock and 111,825 shares of Series C preferred
stock.  Therefore,  the total  consideration  paid by the Company for the Hunter
Subsidiaries was 5,085,077 shares of restricted  common stock and 111,825 shares
of Series C preferred stock.

     On October 31, 1996,  Hunter held a special meeting of its shareholders and
formally  approved  the  Amended  Agreement.  This action  represented  the last
formality  in  completing  the  Business   Combination  and  all  Magnum  shares
previously  held in escrow have been  released  for  distribution  to the Hunter
shareholders.  Subsequent to the Business Combination,  Magnum has conducted its
oil and gas operations and energy related  acquisitions in conjunction  with the
Hunter  Subsidiaries.  Acquisitions  completed  by Magnum and  Hunter  after the
initial  agreement were  completed by Magnum Hunter  Production,  Inc.  ("Magnum
Hunter"), a Hunter Subsidiary.  Hunter and its subsidiaries were consolidated in
Magnum's financial statements beginning December 31, 1995.

     On June 26, 1996, Magnum received a commitment from Wells Fargo Bank, N.A.,
as Agent, and Banque Paribas, as Co-agent, (hereinafter collectively referred to
as  "Banks")  for a new credit  facility  for the  benefit of Magnum and several
wholly-owned  subsidiaries.  The  purpose  of the new  line of  credit was to i)
refinance the Company's  existing  indebtedness  with First  Interstate  Bank of
Texas,  N.A. (a wholly-owned  subsidiary of Wells Fargo Bank, N.A.), ii) finance
the  acquisition  of oil and gas reserves  including the $34.7  million  "Panoma
Property" acquisition,  as discussed below, from Meridian Oil Inc. ("Meridian"),
a  wholly-owned  subsidiary  of  Burlington  Resources,  Inc.,  iii) fund future
property  development,   and  iv)  provide  working  capital  support  and  cash
availability for general corporate purposes. The $100 million credit facility is
subject to a "Borrowing Base" determination established from time-to-time

                                       23

<PAGE>



     by the Banks  based upon  proven  oil and gas  reserves  and gas  gathering
assets  owned  by  Magnum  and its  subsidiaries.  The  availability  under  the
Company's  existing  credit facility was increased at that time from $16 million
to  $48  million  based  upon  the  value  of the  assets  associated  with  the
acquisition  of the  Panoma  Properties.  The  borrowing  base  under the credit
facility was  increased  again in December 1996 to $55 million upon the entry of
First Union  National  Bank of North  Carolina  into the Bank group.  The credit
facility  gives the Company the  flexibility to choose a range of either "LIBOR"
or "Prime" based interest rates options.

     On June 28,  1996,  Magnum  closed on the purchase of 469 natural gas wells
and  approximately  427 miles of a gas gathering  pipeline system from Meridian.
The  net  purchase   price  after  certain   purchase  price   adjustments   was
approximately  $34.7  million  funded by several  loans  under  Magnum's  credit
facilities  with the Banks.  As the purchase was not completed  until the end of
the second  quarter of 1996,  the Statements of Operations for 1996 only include
the operating results of the Panoma  Properties  beginning July 1, 1996. The gas
wells and gas gathering system are located in the Panhandle of Texas and Western
Oklahoma and are more commonly referred to as the "Panoma Properties."

     On November 4, 1996,  Magnum  entered into an agreement to sell certain oil
and gas properties for $1,850,000,  including $150,000 of restricted  securities
of an American Stock Exchange  listed company and a $1,700,000  promissory  note
payable  out of  100% of the net oil  and  gas  income  of the  properties.  The
agreement  provides for  Magnum's  Gruy  subsididary  to continue to operate the
properties for a management fee.

     On December 6, 1996,  Magnum  entered into an agreement to issue  1,000,000
shares of 1996 Series A Convertible Preferred Stock in a private placement.  The
shares have a stated and liquidating preference value of $10 per share and pay a
fixed annual  cumulative  dividend of eight and threee quarters percent (8.75%),
payable  quarterly  in  arrears  beginning  December  31,  1996.  The shares are
convertible  into  shares of common  stock at a  conversion  price of $5.875 per
share.  Beginning  in December  1998,  Magnum has an option to exchange the 1996
Series A Preferred Stock into convertible  subordinated debentures of equivalent
value.  The  purpose  of the  private  placement  was to fund the  capital  cost
necessary  to develop  certain  developmental  drilling and  secondary  recovery
projects. The proceeds were initially used to reduce Magnum's indebtedness under
its Bank credit  facility.  On December  23,  1996,  the 1996 Series A Preferred
Stock was issued, resulting in net proceeds after offering costs of $9,787,000.

     Results of Operations for the Years Ended 1996 and 1995

     As discussed above,  Magnum  completed a business  combination with Hunter,
which  for  accounting  purposes,  was  recorded  under the  purchase  method of
accounting. Hunter's operations were consolidated with those of Magnum beginning
December 31, 1995. In addition,  as discussed  above,  the results of operations
for  fiscal  1996  include  the six  months  operations  from the June 28,  1996
acquisition of the Panoma  Properties.  As such, the comparison of the increases
in the 1996 period over the 1995 period are, unless otherwise stated, the result
of the Hunter operating activities and the acquisition of the Panoma Properties.

     Magnum recorded an operating  profit of $2,871,000 for the 1996 year versus
an operating  loss of  $1,043,000  during the  previous  year.  This  $3,914,000
improvement  in  operations  can be directly  attributable  to i) the  operating
activities of the Panoma Properties acquired on June 28, 1996, ii) the

                                       24

<PAGE>



operating  activities  associated with the acquisition of Hunter on December 22,
1995 and, iii) improved oil and gas commodity sale prices.

     Magnum  realized net income  applicable to common shares of $103,000 (after
dividend  payments on preferred  stock of $406,000) for the year ended  December
31,  1996,  compared to a net loss  applicable  to common  shares of  $1,585,000
(after dividend payments on preferred stock of $617,000) for the preceding year,
a $1,688,000  improvement.  The income per common share  improved to $.01 from a
loss per  common  share  of $.28 in the 1995  period,  a $.29 per  common  share
improvement.

     Total revenue for the year ended December 31, 1996 increased to $16,412,000
from $649,000 in 1995, a $15,763,000 improvement. Revenue from oil and gas sales
increased 1,561 percent during 1996 to $10,248,000 compared to $617,000 in 1995.
Quantities of oil and gas produced during 1996 totaled 191,203 barrels of oil at
a weighted  average  price of $20.46 per  barrel and  2,674,993  mcf of gas at a
weighted  average  price of $2.37 per mcf.  Quantities  of oil and gas  produced
during 1995 totaled 29,972 barrels of oil at a weighted  average price of $15.60
per barrel and 102,056 mcf of gas at a weighted  average price of $1.46 per mcf.
The  quantity  increases  are  primarily  the  result of the  Hunter  and Panoma
acquisitions.  Oil and gas  production  expenses  were  $4,390,000  in 1996  and
$268,000 in 1995, an increase of $4,122,000.  On an equivalent barrel basis, the
production  expense  increased  to $6.89 per barrel in 1996 from $5.69 in 1995 a
21% increase due to start up costs from the Panoma acquisition. The gross margin
from oil and gas production  was  $5,858,000 in 1996 versus  $349,000 in 1995, a
$5,509,000 increase.

     Gas gathering and marketing  activities in 1996,  all of which are a result
of the  acquisition of the Panoma  Properties and the  combination  with Hunter,
provided  revenues of $5,768,000.  The gross  operating  margin was  $1,060,000,
after expenses of $4,708,000 for gas purchases and pipeline operating expenses.

     Revenues from oil field services and commissions  were $396,000 in the 1996
period as  compared  to  $32,000 in the  preceding  year,  a $364,000  increase.
Related costs of services of $267,000 and $26,000 for the 1996 and 1995 periods,
respectively,  were  recognized  resulting in a gross margin of $129,000 in 1996
and $6,000 in 1995.  The  $123,000  increase was due  principally  to the Hunter
acquisition  and the  divestiture  of certain  properties in the fourth  quarter
where operations were maintained.

     Depreciation and depletion rose to $2,951,000 in 1996 from $421,000 in 1995
as a result of the Panoma properties acquisition, and the property base acquired
in the Business  Combination with Hunter.  General and  administrative  expenses
were $1,225,000 in 1996,  $248,000 higher than 1995, due to additional  overhead
required in a significantly expanded operating base.

     Other income is higher in the 1996 period over the 1995 period, partly as a
result of a gain on the sale of marketable securities held for resale.  Interest
expense rose to $2,394,000 in 1996 from $2,000 in 1995, primarily as a result of
commercial  bank  indebtedness  assumed  in  the  combination  with  Hunter  and
additional  borrowings  under the Bank  Credit  Facility as a result of property
acquisitions, principally the Panoma Properties. A provision for deferred income
taxes of $312,000 was made in 1996 whereas none was charged in 1995. The Company
is  not  currently  paying  taxes  due to  utilization  of  net  operating  loss
carryforwards. Preferred dividends decreased to

                                       25

<PAGE>



     $406,000  in 1996  from  $617,000  in  1995 as  Magnum  was  successful  in
completing the  redemption  and  conversion of all of the Company's  outstanding
Series C preferred stock in the third quarter of 1996.

     Liquidity and Capital Resources.

     The Company has three  principal  operating  sources of operating cash: (i)
sales  of oil and  gas,  (ii)  revenues  from  gas  gathering,  processing,  and
marketing, and (iii) revenues from petroleum management and consulting services.
The Company's cash flow is highly  dependent upon oil and gas prices.  Decreases
in the market price of oil and gas could result in  reductions of both cash flow
and the Borrowing Base under the Company's Credit  Facility,  which would result
in decreased funds available, including funds for capital expenditures.

     For 1996, the Company had a net increase in cash of $143,000. The Company's
operating activities provided net cash of $3,028,000, principally from operating
income  before  depreciation,  depletion  and deferred  taxes,  reduced by a net
increase  in  accounts  receivable  over  accounts  payable.  The  Company  used
$41,738,000 in investing  activities,  principally for additions to property and
equipment of  $41,471,000,  as well as  increases in deposits and other  assets.
Financing  activities  provided  $38,853,000  of  cash,   principally  from  the
aggregate  proceeds  from the  issuance  of  long-term  debt  ($56,512,000)  and
production   payments   ($750,000),   less  payments  on  these  liabilities  of
$27,459,000,  as well as  proceeds  from  the  issuance  of  preferred  stock of
$9,796,000.  The  Company  also  paid  $295,000  to  redeem  a  portion  of  the
outstanding  Series C Preferred Stock and $438,000 to pay dividends on preferred
stock.

     For  1995,  the  Company  had a net  decrease  in cash of  $101,000  as the
proceeds  received from the sale of stock were  principally used for oil and gas
acquisition  and  development  activity  and for the  payment of  dividends  and
payables.  The  Company's  operating  activities  used  net  cash  of  $849,000,
principally  as a result of the net loss  from  operations  and the  payoff of a
substantial  amount of accounts payable.  Investing  activities used net cash of
$2,007,000,  largely from acquisition and development of oil and gas properties.
Financing activities accounted for net cash provided of $2,755,000,  principally
from the proceeds  received due to the  issuance of  preferred  stock  mentioned
above.  Partially offsetting the proceeds from the stock issuances were advances
made to Magnum Hunter for  acquisition  costs and working capital of $1,034,000,
prior to their  acquisition by the Company and the ultimate  consolidation,  and
the payment of preferred dividends of $583,000.

     Capital Requirements.

     For 1997, the Company is projecting  exploration  and  development  capital
expenditures  of  approximately  $15  million,   of  which  $3  million  is  for
exploration  projects and $12 million is for development  projects. A portion of
these  expenditures  are required over the next several years under the terms of
the  agreement  whereby the  Company  issued  1,000,000  shares of 1996 Series A
Convertible  Preferred  Stock.  The  balance  of the  funds  required  for these
projects  will  come from  internally  generated  funds  and from the  Company's
revolving credit facility with the Banks.

     In January  1997,  the Company  purchased  for $2.5 million a fifty percent
(50%)ownership  interest  in the McLean  Gas  Plant,  the  natural  gas  liquids
processing facility connected to the Company's Panoma gas gathering

                                       26

<PAGE>



     system. Under the terms of the purchase agreement, the Company will receive
100% of the  profits of the plant until it receives  the $2.5  million  purchase
price,  at which point its  interest  will revert to fifty  percent  (50%).  The
acquisition was funded through the Company's  revolving credit facility with the
Banks.

     In February  1997,  the Company  entered into a definitive  agreement  with
Burlington  Resources,  Inc.  to acquire  for $143.5  million,  effective  as of
January 1,1997,  the Permian Basin  Properties,  consisting of 25 field areas in
West Texas and 21 field areas in Southeast New Mexico,  and containing 3,100 oil
and gas  completions.  In addition to providing the Company with significant new
sources of earnings and operating cash flow,  management of the Company believes
the  Permian  Basin  Properties  will  provide  significant   opportunities  for
exploitation  of both oil and  natural gas  reserves  through a  combination  of
enhanced recovery projects and new drilling projects.

     In accordance with the definitive acquisition agreement, the Company made a
performance  deposit of $10 million  against the $143.5 million  purchase price,
which will be further reduced to take into account production between January 1,
1997  and the  closing  date.  The  company  plans  to fund  the  Permian  Basin
Acquisition  with (i) monies borrowed under a new $150 million  revolving credit
facility  with its Banks  (replacing  the previous $100 million  facility),  for
which the Company has received a commitment  letter,  and (ii) approximately $50
million of  convertible  subordinated  discount notes which the company plans to
offer in a private  placement under Rule 144A. The Company's  obligations  under
the definitive  acquisition  agreement are not subject to a financing condition,
and it is likely the Company would default  under the  acquisition  agreement if
the new credit facility,  the sale of notes, or other adequate  financing is not
arranged on a timely basis. The closing of the Permian Basin Acquisition,  which
is  expected  to  occur  on  or  before  April  30,  1997,  is  conditioned,  in
Burlington's  case,  upon the  approval  of its board of  directors  and, in the
Company's case, upon the satisfactory  results of its due diligence with respect
to accounting, title, and environmental matters.

     Additional sources of capital the Company is currently  considering include
(i) the issuance of high yield  long-term debt, (ii) the sale of common stock in
a secondary public offering, and (iii) the call of the Company's publicly traded
warrants.  It is likely  that one or more of these  sources  will be utilized to
provide additional funds to the Company during the next year.

     The Company has adopted a  "controlled  risk"  approach to its  exploratory
drilling  activity by  concentrating  in specific  regions in the United  States
(primarily   Oklahoma  and  Texas)  where  the  Company's  technical  staff  has
considerable experience and near proved producing properties where the potential
for significant  reserve  additions exist. To the extent  feasible,  the Company
reduces its  exploration  risk by  diversifying  through  investment in multiple
prospects,  by farming out (promoting out) interests to industry partners and by
utilizing 3-D seismic surveys and other advanced technologies.


                                       27
<PAGE>

     As the Company  continues to increase its asset base,  management  plans to
expand the scope of its oil and gas activities, including the Company's possible
participation  in foreign  energy  projects.  The  Company  believes  that Latin
America offers  significantly  greater  hydrocarbon  reserve potential with less
competition  than in the  United  States.  Therefore,  as part of its  long-term
growth  strategy,  the Company  periodically  reviews energy related  investment
opportunities in Argentina, Bolivia, Guatemala, Mexico, Peru and other countries
in Latin  America.  Although no investment has been made to date, the Company is
exposed to some of these  opportunities  through  relationships  established  by
Hunter Butcher.

     In expanding into Mexico,  Central  America or South  America,  the Company
anticipates  that any investment  would be made in partnership  with one or more
partners  either locally or through  parties with whom it had previously  worked
within the United States. In pursuing international  opportunities,  the Company
intends to adhere to its  philosophy of primarily  focusing on proved  producing
properties  that it  perceives  to be  reasonably  priced  and that  afford  the
opportunity   for   significant   enhancement   of  value  through   appropriate
exploitation and development activities utilizing its management expertise.

     Inflation and Changes in Prices.

     During the past several years,  the Company has experienced  some inflation
in oil and gas prices  with  moderate  increases  in  property  acquisition  and
development costs.  During 1996, the Company received somewhat greater increases
in the commodity prices of the natural  resources  produced from its properties.
The  results of  operations  and cash flow of the  Company  have been,  and will
continue  to be  affected  to a certain  extent,  by the  volatility  in oil and
natural gas prices.  Should the Company experience a significant increase in oil
and natural  gas prices that is  sustained  over a  prolonged  period,  it would
expect that there would also be a corresponding  increase in oil and natural gas
finding costs,  lease acquisition costs, and operating  expenses.  Periodically,
the Company  enters into  futures,  options,  and swap  contracts  to reduce the
effects of  fluctuations  in crude oil and natural gas prices.  Under the Credit
Facility with its Banks, the Company was required to hedge a certain  percentage
of its expected natural gas production.

     The  Company's  historic  ability to produce or purchase  gas at a somewhat
lower  price than that at which it is resold has  enabled  the Company to profit
from the price differential,  however,  the marketing of gas for its own account
also  exposes  the  Company  to  the  attendant  commodities  risk.  Hunter  Gas
Gathering,  Inc.  currently  sells the  majority of its gas to  Crosstex  Energy
Services,  a gas marketing firm located in Dallas,  Texas formed in January 1997
when Comstock Natural Gas, Inc. sold its gas gathering, processing and marketing
operations.  Although the Company sold  approximately 91% of its gas to Comstock
in 1996 and has sold a comparable  percentage  to Crosstex to date in 1997,  the
Company  does not believe  that any  discontinuation  of such sales  arrangement
would be  disruptive to the  Company's  gas  marketing  operations.  The Company
typically  obtains  letters of credit  guaranteeing  the payment of the purchase
price for its gas. 

                                       28

<PAGE>



     Item  7.  Consolidated  Financial  Statements  and  Unaudited  Supplemental
               Information


                   Index to Consolidated Financial Statements
                                                                            Page
     Independent Auditors' Report - 1996....................................F-1
     Independent Auditor's Report - 1995....................................F-2
         Financial Statements:
             Consolidated Balance Sheet at December 31, 1996 and 1995.......F-3

             Consolidated Statements of Operations for the Years Ended
                     December 31, 1996 and 1995.............................F-4

             Consolidated Statements of Stockholders' Equity for the
                     Years Ended December 31, 1996 and 1995................ F-5

             Consolidated Statements of Cash Flows for the Years
                     Ended December 31, 1996 and 1995.......................F-7

         Notes to Consolidated Financial Statements.........................F-8

         Supplemental Information (Unaudited)...............................F-26





                                       29

<PAGE>



                          INDEPENDENT AUDITORS' REPORT




Board of Directors and Stockholders
Magnum Hunter Resources, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheet of Magnum
Hunter Resources, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the year then ended.  These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial  position of Magnum Hunter  Resources,
Inc.  and  Subsidiaries  as of  December  31,  1996,  and the  results  of their
operations  and their cash flows for the year then  ended,  in  conformity  with
generally accepted accounting principles.



Deloitte & Touche LLP


Dallas, Texas
March 14, 1997

                                       F-1

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS




Board of Directors and Stockholders
 Magnum Hunter Resources, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheet of Magnum
Hunter Resources,  Inc. (formerly Magnum Petroleum,  Inc.)and Subsidiaries as of
December 31, 1995, and the related consolidated  statements of operations,  cash
flows,  and  stockholders'  equity  for the year  then  ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial  position of Magnum Hunter  Resources,
Inc.  and  Subsidiaries  as of  December  31,  1995,  and the  results  of their
operations  and their  cash  flows  for the  year  ended,  in  conformity  with
generally accepted accounting principles.

As  discussed in Note 2 to the  financial  statements,  the Company  changed its
method of accounting  for oil and gas producing  operations  from the successful
efforts method to the full cost method.



HEIN + ASSOCIATES LLP

Dallas, Texas
April 3, 1996


                                       F-2

<PAGE>
                     MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                            (in thousands of dollars)
<TABLE>
<CAPTION>
                                                                                                December 31,     December 31,
                                                                                                   1996              1995
                                                                                           -----------------------------------------
 <S>                                                                                         <C>                   <C>
                                         ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                             $         1,687       $      1,544
     Securities available for sale                                                                     233                101
     Accounts receivable:
     Trade, net of allowance of $132 and $134                                                        4,372              1,247
     Due from affiliates                                                                               241                116
     Notes receivable from affiliate                                                                   264                121
     Current portion of long-term note receivable                                                      198                201
     Prepaid and other                                                                                  52                 22
                                                                                           -----------------------------------------
          TOTAL CURRENT ASSETS                                                                       7,047              3,352
                                                                                           -----------------------------------------
PROPERTY, PLANT AND EQUIPMENT
     Oil and gas properties, full cost method:
          Unproved                                                                                      459                843
          Proved                                                                                     70,575             36,257
     Pipelines                                                                                        7,102              1,087
     Other property                                                                                     381                146
                                                                                            ---------------------------------------
           TOTAL PROPERTY, PLANT AND EQUIPMENT                                                      78,517             38,333
     Accumulated depreciation, depletion and impairment                                             (4,869)            (1,928)
                                                                                             ---------------------------------------
          NET PROPERTY, PLANT AND EQUIPMENT                                                         73,648             36,405
                                                                                             ---------------------------------------

OTHER ASSETS

     Deposits and other assets                                                                         645                118
     Long-term notes receivable, net of imputed interest                                             1,732                190
                                                                                             ---------------------------------------
                             TOTAL ASSETS                                                   $       83,072       $     40,065
                                                                                             =================      ==============

                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Trade accounts payable and accrued liabilities                                           $       3,698       $      1,283
    Gas imbalance payable                                                                              242
    Dividends payable                                                                                   22                177
    Suspended revenue payable                                                                          784                794
    Current maturities of long-term debt                                                                22              2,014
                                                                                            ----------------------------------------
          TOTAL CURRENT LIABILITIES                                                                  4,768              4,268
                                                                                            ----------------------------------------
LONG-TERM LIABILITIES

   Long-term debt, less current maturities                                                          38,744              7,598
   Production payment liability                                                                        937                288
   Other                                                                                               -                  290
   Deferred income taxes                                                                             3,469              3,125

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock - $.001 par value; 10,000,000 shares authorized
          216,000 designated as Series A; 80,000 and 80,000 issued and outstanding, respectively,
                 liquidation amount $0                                                                 -                   -
          925,000 designated as Series B; none and 62,050 issued and outstanding, respectively         -                   -
          625,000 designated as Series C; none and 625,000 shares issued and outstanding,
                respectively                                                                           -                    1
          1,000,000 designated as 1996 Series A Convertible ; 1,000,000 and none issued and
                outstanding, respectively, liquidation amount $10,000,000                                1                 -
       Common stock - $.002 par value; 50,000,000 shares authorized;
         14,252,822 issued and 11,598,183 shares issued and outstanding, respectively                   29                 23
       Additional paid-in capital                                                                   40,216             29,660 
       Accumulated deficit                                                                          (5,142)            (5,245)
       Unrealized gain on investments, net of income taxes                                              51                 57
                                                                                           ----------------------------------------
                                                                                                    35,155             24,496
      Treasury stock (544,495 shares of common stock)                                                   (1)                -
                                                                                           -----------------------------------------
         TOTAL STOCKHOLDERS' EQUITY                                                                 35,154             24,496

                   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $     83,072       $     40,065
                                                                                              =================     ==============

The accompanying notes are an integral part of these consolidated financial statements.

 </TABLE>
                                       F-3

 <PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except for per share amounts)
<TABLE>
<CAPTION>
                                                                                     For the Years Ended
                                                                                        December 31,
                                                                                ---------------------------
                                                                                  1996               1995
                                                                                ---------------------------
 <S>                                                                               <C>             <C>

OPERATING REVENUE
     Oil and gas sales                                                          $  10,248       $     617
     Gas gathering and marketing                                                    5,768               -
     Oil field services and commissions                                               396              32
                                                                                ---------------------------
          TOTAL OPERATING REVENUE                                                  16,412             649
                                                                                ---------------------------
OPERATING COSTS AND EXPENSES
     Oil and gas production                                                         4,390             268
     Gas gathering and marketing                                                    4,708               -
     Costs related to other services                                                  267              26
     Depreciation and depletion                                                     2,951             421
     General and administrative                                                     1,225             977
                                                                                ---------------------------
         TOTAL OPERATING COSTS AND EXPENSES                                        13,541           1,692
                                                                                ---------------------------
OPERATING PROFIT (LOSS)                                                             2,871          (1,043)

OTHER INCOME                                                                          344              77
INTEREST EXPENSE                                                                   (2,394)             (2)
                                                                                ---------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES                                                 821            (968)

     Provision for deferred income taxes                                              312               -
                                                                                ---------------------------
NET INCOME (LOSS)                                                                     509            (968)


DIVIDENDS APPLICABLE TO PREFERRED SHARES                                             (406)           (617)
                                                                                ---------------------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES                                       $     103       $  (1,585)
                                                                                =============   ===========

INCOME (LOSS) PER COMMON SHARE                                                  $     0.01      $   (0.28)
                                                                                =============   ===========

COMMON SHARES USED IN PER SHARE CALCULATION                                        12,485,893     5,606,669
                                                                                =============   ===========

         The accompanying notes are an integral part of these consolidated financial statements


</TABLE>

                                       F-4
<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                                                 Additional
                                                       Preferred  Stock      Common    Stock   Treasury   Stock   Paid-In
                                                       Shares     Amount     Shares   Amount    Shares    Amount  Capital
                                                       -----------------------------------------------------------------------------
<S>                                                    <C>        <C>       <C>       <C>        <C>      <C>    <C>
Balance at December 31, 1994                            645,775  $     1    4,537,045     $9                        $12,606
                                                       -----------------------------------------------------------------------------

Conversion of preferred stock to common stock           (11,300)      -       28,900       -
Issuance and costs from exercise of warrants             20,750       -      833,324       2                          2,841
Issuance of Series C preferred stock                                                                                    249
Issuance of common stock to acquire oil and gas                                                                      
     properties                                                              386,615       1                          1,378
Issuance of common stock for services                                        602,222       1                          1,370
Issued to directors for collateral                                           125,000       -
Sale of investment shares
Payments received on receivable from stockholders       
Acquisition of Hunter Resources, Inc. for Series C
     preferred stock and common stock                   111,825      -     5,085,077      10                         11,216
Dividends declared on preferred stock
Net loss from operations
Unrealized gain on investments

                                                       -----------------------------------------------------------------------------
Balance at December 31, 1995                            767,050   $    1  11,598,183     $23      -        -        $29,660
                                                       -----------------------------------------------------------------------------
Conversion of preferred stock to common stock           (658,394)     (1)  1,821,638       4                             (3)
Redemption of 28,116 shares of Series C preferred stock  (28,116)    (28)                                              (294)
Issuance of 1996 Series A convertible preferred stock,
     net of offering costs                             1,000,000       1                                              9,786
Shares issued as collateral, returned and held
     as treasury stock                                                       610,170        1   (610,170)    (1)         (1)
Exercise of employees' common stock options                                    -            -     12,258      -           9
Issuance of common stock to acquire oil and gas properties                   188,410        1     51,300      -         938
Sale of investment shares
Dividends declared on preferred stock                                         34,421        -      2,117      -         122
Net income from operations
Unrealized gain on investments, net of income taxes


                                                       -----------------------------------------------------------------------------
Balance at December 31, 1996                           1,080,000   $  1   14,252,822   $  29   (544,495)    $(1)    $40,216
                                                       =========   ====== ==========   ======= =========    =====  ========



     The accompanying notes are an integral part of these consolidated financial
statements




</TABLE>

                                      F-5
<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                                   Unrealized Gain
                                                    Deferred Costs                  Receivable      (Loss) On
                                                    of Warrant         Accumulated  from            Investments
                                                    Offerings          Deficit      Stockholder
                                                  -------------------------------------------------------------
<S>                                                   <C>                 <C>           <C>             <C>
Balance at December 31, 1994                        $(240)              $(3,659)      $(63)            $ (9)
                                                  -------------------------------------------------------------

Conversion preferred stock to common stock
Issuance and costs from exercise of warrants          240
Issuance of Series C preferred stock
Issuance of common stock for services and
     to acquire oil and gas properties
Issued to directors for collateral
Sale of investment shares                                                                                9
Payments received on receivable from stockholders                                        63
Acquisition of Hunter Resources, Inc. for Series C
     preferred stock and common stock
Dividends declared on preferred stock                                      (617)
Net income from operations                                                 (968)
Unrealized gain on investments                                                                          57
                                                 --------------------------------------------------------------
Balance at December 31, 1995                      $   -                 $(5,245)       $ -            $ 57
                                                 --------------------------------------------------------------

Conversion of preferred stock to common stock
Redemption of 28,116 shares of Series C preferred stock
Issuance of 1996 Series A convertible preferred stock,
     net of offering costs
Shares issued as collateral, returned and held
     as treasury stock
Exercise of employees' common stock options
Issuance of common stock to acquire oil and gas properties
Sale of investment shares                                                                             (57)
Dividends declared on preferred stock                                     (406)
Net income from operations                                                 509
Unrealized gain on investments, net of income taxes                                                    51


                                                --------------------------------------------------------------
Balance at December 31, 1996                      $   -               $(5,142)          $  -         $ 51
                                                 =========             =======         =========     =====


                     The accompanying notes are an integral part of these consolidated financial statements

</TABLE>
                                      F-6
<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                          For the Years Ended
                                                                                               December 31,
                                                                                   ------------------------------
                                                                                        1996            1995
                                                                                   ------------------------------
<S>                                                                                   <C>               <C>
CASH FLOW FROM OPERATING ACTIVITIES:
   Net income (loss)                                                               $   509            $ (968)
   Adjustments to reconcile net income (loss) to cash provided by (used for)
          operating activities:
      Depreciation and depletion                                                     2,951               421
      Deferred income taxes                                                            312                 -
      Common stock issued for services                                                   -               102
      (Gain) Loss on sale of assets                                                   (143)               76
      Other                                                                             32                15
      Changes in certain assets and liabilities:
        Accounts receivable                                                         (3,250)              (37)
        Costs in excess of billings on uncompleted drilling contracts                    -                55
        Deposits and other assets                                                      (30)                -
        Accounts payable and accrued liabilities                                     2,647              (513)
                                                                                   ------------------------------
Net Cash Provided By (Used By) Operating Activities                                $ 3,028            $ (849)
                                                                                   ------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of assets                                                        318                88
   Additions to property and equipment                                             (41,471)           (1,244)
   Increase in deposits and other assets                                              (527)                -
   Loan made for promissory note receivable                                            (58)             (121)
   Payments received on promissory notes receivable                                      -               334
   Purchase of securities available for sale                                             -               (30)
   Obligations and property acquisitions funded in Hunter acquisition                    -            (1,034)
                                                                                   ------------------------------
   Net Cash Used By Investing Activities                                           (41,738)           (2,007)
                                                                                   ------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt and production payment                  57,262                 -
   Payments of principal on long-term debt and production payment                  (27,459)             (186)
   Payments on other liabilities                                                      (290)                -
   Proceeds from issuance of common and preferred stock,
           net offering costs                                                        9,796             3,332
   Redemption of preferred stock                                                      (295)                -
   Payments received on notes receivable                                               277                62
   Increase in segregated funds for payments of notes payable                            -               130
   Dividends paid                                                                     (438)             (583)
                                                                                  -------------------------------

   Net Cash Provided By Financing Activities                                        38,853             2,755
                                                                                  -------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   143              (101)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     1,544             1,645
                                                                                   ------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        $  1,687         $   1,544
                                                                                  ============     ==========



</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements


                                      F-7

<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization   and   Nature  of   Operations:

     Magnum  Hunter  Resources,Inc.(the"Company"),  formerly  Magnum  Petroleum,
Inc.,  is  incorporated  under the laws of the state of Nevada.  The  Company is
engaged in the acquisition, operation and development of oil and gas properties,
the gathering,  transmission and marketing of natural gas, providing  management
and advisory  consulting  services on oil and gas  properties for third parties,
and providing  consulting and U.S. export services to facilitate  Latin American
trade in energy products. In conjunction with the above activities,  the Company
owns and operates oil and gas  properties  in six states,  predominantly  in the
Southwest  region of the  United  States.  In  addition,  the  Company  owns and
operates four gathering systems located in Texas, Louisiana and Oklahoma.

     Merger and Consolidation

     The accompanying  consolidated financial statements include the accounts of
the  Company  and  its  existing  wholly-owned   subsidiaries,   Gruy  Petroleum
Management Company,  Hunter Butcher  International  Limited Liability Company, a
Wyoming  limited   liability   company,   Hunter  Gas  Gathering,   Inc.  Inesco
Corporation,  Magnum Hunter  Production,  Inc. Midland Hunter Petroleum  Limited
Liability Company,  a Wyoming limited liability company,  and SPL Gas Marketing,
Inc.  As more fully  discussed  in Note 3, the Company  entered  into an amended
definitive agreement on December 19, 1995 to acquire all of the assets,  subject
to the existing liabilities,  of Hunter Resources, Inc. ("Hunter"). The purchase
was accounted for by the purchase method  effective  December 31, 1995. As such,
the accompanying  consolidated financial statements for 1995 include the balance
sheet accounts of Hunter. However, the Statement of Operations for 1995 does not
include  the  operations  of  Hunter  for  that  fiscal  year.  All  significant
intercompany  accounts and transactions  have been eliminated in  consolidation.
Certain   reclassifications   have  been  made  to  the  consolidated  financial
statements of the prior year to conform with the current presentation.

Cash and Cash Equivalents
         The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.  The Company has cash
deposits in excess of federally insured limits.

Investments
         In  1994,  the  Company  adopted  Statement  of  Financial   Accounting
Standards  No.  115,  Accounting  for  Certain  Investments  in Debt and  Equity
Securities.  Under this standard, the equity securities held by the Company that
have  readily   determinable  fair  values  are  classified  as  current  assets
available-for-sale  and are measured at fair value.  Unrealized gains and losses
for these  investments  are reported as a separate  component  of  stockholders'
equity.

     At December 31, 1996,  the Company's  available for sale  securities had an
amortized cost basis of $150,000,  gross  unrealized gains reported in equity of
$82,500 and a fair market value

                                       F-8

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     of  $232,500.  During  1996,  Securities  were sold for gross  proceeds  of
$187,312 and the Company realized a gain of $142,872.

     At December 31, 1995,  the Company's  available for sale  securities had an
amortized cost basis of $44,440,  gross  unrealized  gains reported in equity of
$57,200 and a fair market value of $101,640.  During 1995,  Securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.

Suspended Revenues
         Suspended  revenue  interests  represent  oil and gas sales  payable to
third  parties  largely on  properties  operated  by the  Company.  The  Company
distributes such amounts to third parties upon receipt of signed division orders
or resolution of other legal matters.

Oil and Gas Producing Operations
         The Company follows the full-cost  method of accounting for oil and gas
properties,  as prescribed by the  Securities and Exchange  Commission  ("SEC").
Accordingly, all costs associated with acquisition,  exploration and development
of oil  and  gas  reserves,  including  directly  related  overhead  costs,  are
capitalized.

     All capitalized  costs of oil and gas  properties,  including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using  estimates of proved  reserves.  Cost directly  associated with the
acquisition  and  evaluation  of  unproved  properties  are  excluded  from  the
amortization  base until the related  properties  are  evaluated.  Such unproved
properties  are  assessed  periodically  and any  provision  for  impairment  is
transferred to the full-cost  amortization base. Sales of oil and gas properties
are  credited to the  full-cost  pool  unless the sale would have a  significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's unproved
properties  excluded  from the  amortization  base were $459,000 and $843,000 at
December  31,  1996 and 1995,  respectively.  These  costs arose in 1995 and are
expected to be evaluated and  transferred  into the  amortization  base over the
next twelve months.

     The net capitalized  costs are subject to a "ceiling test," which generally
limits such costs to the aggregate of the estimated  present value of future net
revenues  from  proved  reserves  discounted  at ten  percent  based on  current
economic and operating conditions.

Drilling Operations
         Fees from  fixed-price  contracts with other working interest owners to
drill,  complete and place oil and gas wells into  production less related costs
are accounted for as adjustments to oil and gas properties.


                                       F-9

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pipelines
         Pipelines  are  carried at cost.  Depreciation  is  provided  using the
straight-line  method over an estimated useful life of 15 years. Gain or loss on
retirement  or sale or other  disposition  of assets is  included  in results of
operations in the period of disposition.

Other Property
         Other  property  and  equipment  are carried at cost.  Depreciation  is
provided using the straight-line method over estimated useful lives ranging from
five to ten years.  Gain or loss on retirement or sale or other  disposition  of
assets is included in results of operation in the period of disposition.

Other Oil and Gas Related Services
         Other oil and gas related  services consist largely of fees earned from
the Company's  salt water  disposal  facility.  Such fees are  recognized in the
month the disposal service is provided.

Impact of Recently Issued Pronouncements

     The  Financial  Accounting  Standards  Board has issued  Statement No. 121,
("SFAS No. 121")  "Accounting for Impairments of Long-Lived Assets and Assets to
be  Disposed   of",  and  Statement  No.  123,   "Accounting   For   Stock-Based
Compensation"  ("SFAS No. 123").  The Company adopted the provisions of SFAS No.
121 in  1996  but it did not  have  any  effect  on the  Company's  consolidated
financial  statements,  and it adopted the disclosures  only portion of SFAS No.
123 as it  continued  to  follow  the  provisions  of APB No.  25  which  is the
intrinsic value method of accounting for stock-based  compensation.  See Note 15
which follows for the effect of stock based compensation on a proforma basis.

Income Taxes
         The Company  files a  consolidated  federal  income tax return.  Income
taxes are provided for the tax effects of transactions reported in the financial
statements  and consist of taxes  currently due, if any, plus net deferred taxes
related primarily to differences between the basis of assets and liabilities for
financial  and  income  tax  reporting.  Deferred  tax  assets  and  liabilities
represent the future tax return  consequences of those  differences,  which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred tax assets include  recognition of operating  losses that are
available to offset future  taxable income and tax credits that are available to
offset  future  income  taxes.  Valuation  allowances  are  recognized  to limit
recognition  of deferred tax assets where  appropriate.  Such  allowances may be
reversed when  circumstances  provide evidence that the deferred tax assets will
more likely than not be realized.



                                       F-10

<PAGE>


                  MAGNUM HUNTER RESOURCES, INC.AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income or Loss Per Common Share
         Income or loss per common share is based on the weighted average number
of shares of common stock outstanding.  Convertible securities and warrants were
anti-dilutive  at  December  31,  1996 and 1995  and  were not  included  in the
calculation of income or loss per common share.

Deferred Cost of Warrant Exercise Offering
         The  Company  incurred  costs  to  update  its  registration  statement
relating to Series C preferred  stock that is convertible  into common stock and
relating to common  stock  purchase  warrants.  The Company made an offer to the
warrant holders  allowing them to exercise their warrants at a discount  through
February 16, 1995. As presented in Note 9, certain of the common stock  purchase
warrants were  exercised  prior to the  expiration of the discount  period.  The
Company had deferred direct costs as of December 31, 1994 of $240,281 related to
the discounted  warrant exercise  offering.  Such costs and $250,488 incurred in
1995 were offset against the proceeds  received in 1995 from the exercise of the
warrants. There were no warrants exercised during 1996.

Use of Estimates and Certain Significant Estimates
         The  preparation  of the Company's  financial  statements in conformity
with generally accepted accounting  principles requires the Company's management
to make  estimates  and  assumptions  that affect the amounts  reported in these
financial  statements and accompanying  notes.  Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas  reserves,  which as described  above may affect the amount at which
oil and gas properties are recorded.  It is at least  reasonably  possible those
estimates  could be  revised  in the  near  term and  those  revisions  could be
material.

NOTE 2--CHANGE IN ACCOUNTING METHOD

         The Company  accounted for its oil and gas producing  activities  using
the successful efforts method from inception through June 30, 1995. However, the
full cost method has  subsequently  been adopted.  The Company is of the opinion
that the full cost method of accounting is preferable to the successful  efforts
method of accounting for its oil and gas activities for the following reasons:

  (1)     The Company recently acquired the subsidiaries of Hunter (See note 3),
          which comprise  corporations engaged in oil and gas related activities
          and  which  utilize  the full  cost  method  of  accounting  for these
          activities. For both legal and accounting purposes, the

                                       F-11

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Company  is  the  acquiring  entity;  however,  the  subsidiaries  are
          increasing  their oil and gas  activities and have more proved oil and
          gas  reserves  than the  Company.  Furthermore,  management  of Hunter
          became  the   management  of  the  Company  upon   completion  of  the
          acquisition.  One  of  the  Hunter  subsidiaries  specializes  in  the
          management of oil and gas properties and all accounting  functions and
          financial   reporting  have  been  undertaken  by  the   subsidiaries'
          personnel. The individuals employed by the subsidiaries have comprised
          the vast majority of the Company's  employees and the Company believes
          that by allowing these  employees and Hunter's  management to continue
          to use the full cost method,  it would  greatly  benefit in accurately
          reporting on its oil and gas operations.

  (2)     The subsidiaries  have established relationships with lending sources
          which the Company  intends to  continue  to utilize  and expand  upon.
          These sources are accustomed to evaluating the subsidiaries' financial
          statements on the full cost method of accounting.  The Company intends
          to request  additional  borrowing  arrangements from these lenders and
          believes  that it is  desirable  for these  lending  sources to review
          financial statements prepared on a consistent basis.


                                      F-12

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The accompanying  financial statements have been restated to apply the full
cost  method   retroactively.   This  change  in  accounting  principle  has  no
significant  effect on income taxes. The effect of the accounting  change on net
loss and accumulated  deficit as previously  reported for the respective periods
is:


<TABLE>
<CAPTION>


                                                                                               1995
                                                                                      -----------------------
<S>                                                                                  <C>
Statement of Accumulated Deficit:

Balance at Beginning of Period as Previously Reported                                 $          (4,166,058)

Add Adjustment for the Cumulative Effect on Prior Years
  of Applying Retroactively the Full Cost Method                                                    506,651
                                                                                      -----------------------    
Balance at Beginning of Period, as Adjusted                                                      (3,659,407)

Net Loss                                                                                           (968,272)

Preferred Dividends                                                                                (617,220)
                                                                                       ----------------------
Balance at End of Year                                                                 $         (5,244,899)
                                                                                       ======================
</TABLE>

The effect on 1995 operations of changing the accounting  method was to increase
net loss and net loss per share by $307,000 and $.05, respectively.


NOTE 3--ACQUISITIONS AND DISPOSITIONS

          During March 1995,  the Company  acquired an additional  fifty percent
(50%)  working  interest  (for a total  of 100%  working  interest)  in a proved
undeveloped  oil and gas property on which one well is located.  The acquisition
cost of this  additional  interest was $410,000,  of which  $130,000 was paid in
cash and 80,000 shares of the Company's restricted common stock, valued at $3.50
per share,  were  issued.  During  April  1995,  the  Company  also  acquired an
additional 40 percent (40%) working interest (for a total 90% working  interest)
in a proved undeveloped  property on which one well is located.  The acquisition
cost of this additional interest was $480,000, of which $20,000 was paid in cash
and 125,000 shares of the Company's restricted common stock were issued,  valued
at $3.50 per share,  and the  transfer of  securities  held by the Company as an
investment in equity securities at December 31, 1994.

     In October 1995,  the Company  issued  85,131  shares of restricted  common
stock,  valued at $3.52  per  share,  in an  acquisition  completed  by a Hunter
subsidiary for the remaining  stock  ownership  interest in a limited  liability
company.  Also, in October 1995,  the Company issued 64,176 shares of restricted
common  stock,  valued  at $4.00 per  share,  in an  acquisition  of oil and gas
properties  completed  by a Hunter  subsidiary.  In December  1995,  the Company
issued 32,308 shares of restricted common stock,

                                      F-13

<PAGE>


                  MAGNUM HUNTER RESOURCES, INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     valued  at $3.25  per  share,  in an  acquisition  of a proven  undeveloped
property by a Hunter subsidiary.

          The  Company  executed  a  definitive  agreement  on July 21,  1995 to
acquire  all of the  assets,  subject  to the  existing  liabilities  of  Hunter
Resources,  Inc.  ("Hunter").  Pursuant to the  agreement,  the Company  issued,
subject to shareholder approval, 2,750,000 shares of its restricted common stock
to Hunter in exchange for the assets  acquired.  In addition,  575,000 shares of
restricted  common stock were issued to a third party as an  additional  cost of
the acquisition. The third party distributed a total of 250,000 of the shares to
a former  director and a former  officer of the Company for their  assistance in
completing the acquisition.

          On December  19, 1995 to be effective  December 22, 1995,  the Company
and Hunter entered into an amended agreement.  Under the terms of the amendment,
which was executed by Hunter shareholders  representing over fifty percent (50%)
of the common stock of Hunter,  an  additional  2,335,077  shares of  restricted
common  stock and  111,825  shares of Series C  preferred  stock were  issued to
Hunter.  The acquisition was recorded under the "purchase method" of accounting,
based  upon the  estimated  value  of the  shares  issued  of  $12,495,005.  The
operations of Hunter have been  consolidated with those of the Company beginning
on December 31, 1995.

          On June 28,  1996,  the  Company  purchased  469 natural gas wells and
approximately  427 miles of a gas gathering  pipeline  system for a net purchase
price of  $34,652,395.  The properties are located in the Panhandle of Texas and
Western Oklahoma and are referred to as the "Panoma Properties". As the purchase
was not completed until the end of the second quarter of 1996, the  consolidated
financial  statements  for 1996  include  the  operating  results  of the Panoma
Properties for only the last six months of the year.

     On November 4, 1996, the Company  entered into an agreement to sell certain
oil  and  gas  properties  for  $1,850,000,  including  $150,000  of  restricted
securities  of an  American  Stock  Exchange  listed  company  and a  $1,700,000
promissory  note  payable  out of 100% of the  net  oil  and gas  income  of the
properties.  The  agreement  calls for the  Company's  subsidiary to continue to
operate the properties for a monthly management fee.

     The following summary,  prepared on a pro forma basis, presents the results
of  operations  for the  years  ended  December  31,  1996 and  1995,  as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information  includes  the  effects of  adjustments  for  increased  general and
administrative  expense,  interest expense,  depreciation,  depletion and income
taxes:

                                      F-14

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>

                                                                           (Unaudited)
                                                                   1996                  1995
<S>                                                                <C>               <C>
Revenue...................................................          $ 20,653,000      $ 12,512,000
Net Income (Loss) Applicable to Common Stock..............              (304,000)       (4,403,000)
Net Income (Loss) Per Common Share........................          $       (.02)     $       (.79)
Average shares outstanding................................            12,485,893         5,606,669
</TABLE>
NOTE 4--NOTES RECEIVABLE

         During July of 1994, the Company  received an interest bearing note due
on May 1, 1995,  in exchange for $319,206  paid by the Company.  Interest in the
amount of $3,000 per month  accrued  through  February  28, 1995 and was paid in
March 1995.  For the remaining two months,  interest in the amount of $4,500 per
month was accrued which,  along with the principal  amount,  was paid during May
1995. The note was collateralized by securities,  the fair market value of which
was less than the amount of the note.

     On July  28,  1995,  the  Company  received  a  non-interest  bearing  note
receivable  in the amount of $223,500 in exchange for its interest in an oil and
gas  property.  Interest at 10 percent was  inputed on the note  resulting  in a
discount of $28,366.  The note  provides  for payments of $7,000 per month which
were received timely in 1996. As of December 31, 1996, the unpaid  balance,  net
of discount, is $112,288.

     On November 4, 1996, the Company  received an interest  bearing note due on
November  1, 1999,  in  exchange  for its  interest  in oil and gas  properties.
Interest is at the rate of 12% per annum. The note is collateralized by stock in
an American Stock Exchange  listed company and the oil and gas properties  sold.
As of December 31, 1996, the unpaid balance is $1,627,534.

NOTE 5--RELATED PARTY TRANSACTIONS

         In conjunction  with the  acquisition of Hunter,  the Company assumed a
note receivable with a balance of $178,527 and $120,758 at December 31, 1996 and
1995 respectively, from an owner in an affiliated limited liability company. The
note  provides  for  interest  at ten  percent and has a due date of January 31,
1997.

         In connection  with the  acquisition of Hunter,  the Company  assumed a
note receivable  from a company  affiliated with the President of the Company in
the amount of $54,615 at December 31, 1996 and 1995. This note bears interest at
ten percent and is due on demand.  Additionally,  trade accounts receivable from
this affiliated  company were $30,761 and $51,346 at December 31, 1996 and 1995,
respectively.


                                      F-15

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In  connection  with the  acquisition  of Hunter,  the Company  assumed
unsecured  accounts  receivable  from the President  personally in the amount of
$10,000 as of December 31, 1995, which amount has been subsequently repaid.

     A company owned by two former directors of the Company previously  operated
several of the wells in which the Company owned an interest. Operating fees paid
this  company  were  $35,519  in  1995.  The  operations  of  these  wells  were
transferred  to a subsidiary  of Hunter  during 1995.  In addition,  the related
company  received  a  commission  of  $25,000  from  the  sale of an oil and gas
property to the Company in 1995.

     During 1996, as part of the Company's  overall  compensation  package,  the
Company's  officers  and  directors  were  granted the right to  participate  in
certain development and exploration projects of the Company on a promoted basis.
As of December 31, 1996, eleven (11) of the Company's  officers and directors as
a group spent an aggregate  of $137,340  participating  in 6 wells.  The Company
discontinued this program as of January 1, 1997.

NOTE 6--LONG-TERM DEBT

Long-term debt at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
                                                                                               1996           1995
                                                                                               ----           ----
<S>                                                                                            <C>           <C>
     Banks

         Revolving promissory note, collateralized by pipeline and oil and gas
         properties,  due June 30,  2001,  interest at LIBOR + 2.25%  (total of
         7.625% at December 31, 1996)(1)                                                   $ 38,700,000       $     -

         Promissory note,  collateralized  by pipelines and oil and gas
         properties,payable in monthly installments for 1996 of $174,000 through
         October 1,1996, then $171,000  thereafter plus interest at prime plus
         one percent(total of 9.75% at December 31, 1995), assumed in Hunter
         acquisition(2)                                                                           -            9,555,000

         Note payable, payable in monthly installments of $498 through July 1996
         plus interest at 7.25 percent, collateralized by truck,                                  -                3,000 

         Note  payable  to  bank   collateralized  by  vehicle  payable  in
         monthly installment  of $1,031  including  interest at 8.5% through
         February  1999.                                                                          24,000             -


Other
         Notes payable,  non-interest bearing and  uncollateralized,  payable in
         monthly installments of $1,000 through July 1, 2000, assumed
         in Hunter acquisition                                                                    42,000          54,000
                                                                                        --------------------------------------------
    Total Long-Term Debt                                                                      38,766,000       9,612,000
    Less Current Portion                                                                          22,000       2,014,000
                                                                                        --------------------------------------------
    Long-Term Debt                                                                      $     38,744,000      $7,598,000
                                                                                        ============================================
</TABLE>





                                      F-16

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of long-term  debt based on  contractual  requirements  for the years
ending December 31, are as follows:

                                           1997                $      22,000
                                           1998                       24,000
                                           1999                       14,000
                                           2000                        6,000
                                           2001                   38,700,000
                                                               --------------
                                                               $  38,766,000
                                                               ==============

     (1) The  revolving  promissory  note to the  banks is a  borrowing  under a
$100,000,000  line  of  credit  on  which  there  existed  a  borrowing  base of
$55,000,000  at December 31, 1996.  The level of the borrowing base is dependent
on the valuation of the assets  pledged,  primarily oil and gas reserve  values.
The line of credit  includes  covenants,  the most  restrictive of which require
maintenance of a current ratio, interest coverage ratio, and tangible net worth,
as specified in the loan  agreement.  The bank group must approve all  dividends
paid on common stock.

     (2) The promissory note to bank was a borrowing under a $20,000,000 line of
credit on which there existed a borrowing base of approximately  $8.7 million at
December 31, 1995.  The balance at December 31, 1995 included  $1,125,000 due to
the seller of certain oil and gas  properties  which was refinanced in February,
1996 under the line of credit.  The final  principal  payments under the line of
credit were due June 1, 2000.  The amount that could be borrowed  under the line
of credit was based upon a designated  percentage of oil and gas reserve values.
The line of credit  included  covenants,  the most  restrictive of which require
maintenance of a current ratio and tangible net worth, as  specifically  defined
in the loan agreement.

NOTE 7--PRODUCTION PAYMENT LIABILITY

     As a result of the  merger  with  Hunter in 1995,  the  Company  assumed an
obligation under a production payment conveyance.  The conveyance provides for a
royalty payment equal to 50% of the monthly net revenue proceeds received by the
Company in certain oil and gas properties. The balance owed under the conveyance
bears interest at 15% per annum and is non-recourse to the Company.  The balance
owed under this  conveyance  was  $210,000 and $288,000 at December 31, 1996 and
1995, respectively.

     In November,  1996, the Company  entered into a second  production  payment
conveyance with the same party. The Company received a production payment amount
of $750,000 and agreed to make royalty  payments of up to 50% of the monthly net
revenue proceeds received from certain oil and gas properties.  The balance owed
under the conveyance  was $726,000 at December 31, 1996. The production  payment
bears  interest  at the rate of  13.5%  per  annum  and is  non-recourse  to the
Company.

NOTE 8--INCOME TAXES

          The Company  accounts for income taxes in accordance with Statement of
Financial  Accounting  Standards No. 109,  Accounting  for Income  Taxes,  which
requires the recognition of a liability or asset, net of a valuation  allowance,
for the deferred tax consequences of all temporary  differences  between the tax
bases and the  reported  amounts of assets and  liabilities,  and for the future
benefit of operating loss  carryforwards.  The following is a reconciliation  of
income tax expense reported in the statement of operations:


                                                     1996
Tax expense at statutory rates              $       279,000
State taxes                                          24,000
Other                                                 9,000
                                            -----------------------
     Total                                  $       312,000
                                            =======================


                                      F-17
<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax effects of significant  temporary  differences and  carryforwards are as
follows:
<TABLE>
<CAPTION>


                                                                                      December 31,
                                                                                1996           1995
<S>                                                                   <C>                 <C>
Property and equipment, including intangible drilling costs           $      (6,381,000)   $(5,890,000)
Annualized gain on investment                                                   (32,000)          -
                                                                     -------------------------------------
Total deferred tax liability
                                                                             (6,413,000)    (5,890,000)
                                                                     -------------------------------------
Allowance for doubtful accounts                                                  49,000         50,000
Depletion carryforwards                                                         361,000        365,000
Operating loss carryforwards                                                  2,534,000      2,350,000
                                                                      ------------------------------------
Total deferred tax assets                                                     2,944,000      2,765,000

Valuation allowance                                                                -               -
                                                                      ------------------------------------
 Net Deferred Tax Liability                                             $    (3,469,000)   $(3,125,000)
                                                                          ==============    ===========






</TABLE>

     The Company and its  subsidiaries  have net  operating  loss  carryforwards
(NOL) of approximately $6,900,000 that expire, if unused, in years through 2011,
none in 1997.  Approximately  $1,700,000  of the NOL  carries  a  limitation  of
approximately  $200,000  per  year.  In  addition,  the  Company  has  depletion
carryforwards of approximately $1,000,000.

NOTE 9--STOCKHOLDERS' EQUITY

     Shares  of  preferred  stock  may be  issued  in  such  series,  with  such
designations,  preferences, stated values, rights, qualifications or limitations
as determined  solely by the Board of  Directors.  Of the  10,000,000  shares of
$.001 par value  preferred  stock the Company is  authorized  to issue,  216,000
shares have been  designated as Series A Preferred  Stock,  925,000  shares have
been designated as Series B Preferred Stock, 625,000 shares have been designated
as Series C Preferred  Stock and 1,000,000  shares have been  designated as 1996
Series A Convertible Preferred Stock. Thus, 7,234,000 preferred shares have been
authorized  for  issuance  but have not been issued nor have the rights of these
preferred shares been  designated.  No dividends can be paid on the common stock
until the dividend requirements of the preferred shares have been satisfied.

     Holders of the Series A Preferred  Stock are entitled to receive  dividends
only to the extent that funds are available from the West Dilley Prospect.  Such
dividends are limited to $7.50 per share, in the aggregate. Dividend payments to
Series A preferred  shareholders will be based on fifty percent (50%) of the net
operating  revenue  received by the working  interest  owners of the West Dilley
Prospect. Due to a decline in production from the well located on this prospect,
the Company has shut this well in and is no longer  producing the property.  The
Series A dividends are not  cumulative  except for unpaid  amounts due from this
calculation.  No dividends have been paid on the Series A preferred stock. There
is no aggregate annual dividend requirement for the Series A preferred stock.

     The  Series B  Preferred  Stock was  issued as a unit,  comprised  of 1,000
shares of Series B Preferred Stock and two production certificates. The Series B
preferred  stockholders  are entitled to receive  cumulative  dividends of $0.35
annually per share, payable quarterly.  The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The

                                      F-18

<PAGE>


                  MAGNUM HUNTER RESOURCES, INC.AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     production payments were derived from 50% of the Company's net revenue from
production  of oil and gas.The  Board of  Directors  declared  dividends  on the
Series B  preferred  stock of $21,893  for the year  ended  December  31,  1995.
Beginning June 15, 1994, the Company offered to exchange (the "Exchange  Offer")
1,250 shares of common stock for each Series B  production  certificate.  During
1994, 141.1 production  certificates were exchanged for 176,375 shares of common
stock and the Series B preferred  shareholders  agreed to convert their Series B
preferred  shares into common stock at December 31, 1995 if all  dividends  were
paid through that date.  All of the shares were converted to common stock during
1996.

     Separate and apart from the Exchange Offer,  two of the Company's  officers
and directors (the  "Officers")  set aside 125,000 shares (the "Stock") of their
own common stock of the Company for a single  individual (the  "Individual") who
owned  approximately  55% of the  Series B  Production  certificates  that  were
exchanged.  The Stock was being held by an independent party to this transaction
until fair market value of the Exchange Shares,  when the Exchange Shares become
eligible  for sale  pursuant  to Rule  144 of the  Securities  Act of  1933,  is
determined.  The  Company  issued  125,000  shares  of its  common  stock to the
Officers in exchange for their assignment to the Company of all of the Officers'
rights, title and interest in the Stock. The Company has recorded the new shares
issued at par value.  The value of the exchange  shares were determined in 1996,
and the  Company  issued  5,000  shares of its common  stock to the  Individual.
Subsequently  to year-end,  the 125,000  shares being held were  returned to the
Company and are being held as treasury stock.

     The Series C preferred stock was convertible at the option of the holder at
any time into three shares of common stock and, after  November 12, 1994,  would
automatically  convert  into common  stock  anytime the closing bid price of the
common stock equals or exceeds  $5.00 per share for twenty  consecutive  trading
days.  The Series C preferred  stock was  redeemable  by the  Company  beginning
November 12, 1995,  at $10.50 per share plus  accrued and unpaid  dividends.  If
declared by the Board of Directors, dividends accrue at the annual rate of $1.10
per share, are cumulative from the date of first issuance and are paid quarterly
in arrears.  The Board of Directors declared dividends on the Series C preferred
stock of $595,327 and $339,827 for the year ended  December 31,  1995,and  1996,
respectively.  The aggregate annual dividend requirements for the 625,000 shares
of Series C preferred stock outstanding at December 31, 1995 and 1996 amounts to
$687,500 and none, respectively. As of December 31, 1996, all Series C preferred
stock had been redeemed or converted to common stock.

     On  December  6, 1996,  the  Company  entered  into an  agreement  to issue
1,000,000  shares of new Series A  preferred  stock,  known as the 1996 Series A
Convertible  Preferred Stock, in a private  placement.  The shares have a stated
and  liquidation  value  of $10 per  share  and pay a  fixed  annual  cumulative
dividend of eight and three quarters percent (8.75%) payble quarterly in arrears
beginning  December 31, 1996. The shares are  convertible  into shares of common
stock at a conversion price of $5.875 per share. Beginning in December 1998, the
Company  has an  option to  exchange  the stock  into  convertible  subordinated
debentures of equivalent value. The purpose of the private placement was to fund
the capital cost necessary to drill certain development projects and to fund the
capital  costs of several  West Texas  waterflood  projects.  Proceeds  from the
offering were initially used to reduce the Company's existing bank indebtedness.
Certain  capital  expenditure   requirements  for  developmental   drilling  and
waterflood  projects are  required  under the  agreement  whereby this stock was
issued.  In addition,  under the terms of the  preferred  stock,  the Company is
required to raise an aggregate of $15 million of additional  equity by March 31,
1998 or the  Company is required to redeem on June 30 of each of the years 2006,
2007,  and 2008,  333,333 shares of preferred  stock.  On December 23, 1996, the
1996 Series A Convertible Preferred Stock was issued,  resulting in net proceeds
to the Company after  offering  costs of  $9,787,000.  Dividends of $22,000 were
declared in 1996 and paid subsequent to year end.

     The preferred shareholders are not entitled to vote except on those matters
in which the consent of the holders of preferred stock is specifically  required
by Nevada  law. If the Company  were to  liquidate  prior to payment of the full
dividend  requirements on the preferred stock, the preferred stock would receive
a liquidation  preference from the liquidation proceeds.  The Series A preferred
shareholders  would  receive an amount equal to the lesser of the proceeds  from
the  liquidation of the West Dilley Prospect or the remaining  unpaid  dividend.
The 1996 Series A Convertible Preferred Stock would receive an amount of $10 per
share.  On  liquidation,  holders of all series of the preferred  stock would be
entitled to receive the par value,  $.001 per share, in preference to the common
stock shareholders.


                                      F-19

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Series C preferred  stock was originally  issued as a unit comprised of
one share of Series C preferred  stock and warrants to purchase three (3) shares
of common stock. A total of 1,687,500  warrants were issued and are  exercisable
at $5.50 per share through November 12, 1998. The Company offered the holders of
the warrants a discount period commencing  November 15, 1994 and ending February
16, 1995 during which time the warrants could be exercised at $4.00. During this
time,  warrants were exercised for 833,324 shares of common stock.  The exercise
of these  warrants  resulted in cash proceeds of $3,333,298 to the Company.  The
warrants are  redeemable  by the Company at $0.02 per warrant upon 30 day notice
at any time after  November  12, 1995 or earlier if the closing bid price of the
common stock  equals or exceeds  $6.75 for five  consecutive  trading  days.  At
December 31, 1995, 854,176 of the warrants remained outstanding.

          The Company granted an unrelated  company the right to acquire 100,000
shares of common  stock under the terms of a  consulting  agreement.  The rights
became  exercisable at the rate of 3,325 shares in November  1994,  8,335 shares
per month from December  1994 through  October 1995 and 4,990 shares in November
1995.  The rights are  exercisable  at $4.125 per share.  The rights  expire in
June 1997.

     In  October  1995,  in  connection  with  an  acquisition  of oil  and  gas
properties,  the Company issued 25,000  warrants with an exercise price of $4.00
per share,  and 25,000  warrants with an exercise  price of $4.50 per share with
each such warrant  expiring in October 1997. In December 1995 the Company issued
37,500 warrants at an exercise price of $3.00 per share to an unaffiliated third
party for services rendered. The warrant expires December 1997.

     During 1995, 20,750 representatives'  warrants were exercised at $12.00 per
warrant resulting in $249,000 of proceeds to the Company.  Each warrant entitles
the holder to receive one share of Series C preferred stock and three (3) common
stock warrants  exercisable  at $4.00 per share through  February 1995 and $5.50
thereafter.  9,300 shares of Series C preferred stock and 2,000 shares of Series
B preferred  stock have also been  converted into 28,900 shares of common stock.
The Company  issued 5,000 shares of common  stock,  valued at $3.50 per share to
its directors,  which resulted in $17,500 of compensation expense in 1995. Also,
22,222  shares of common  stock with a value of $3.80 per share were  issued for
services rendered in 1995.

     In January,  1996,  60,000  warrants  were  issued at an exercise  price of
$3.375 per share and expiring in January 1999.  At December 31, 1996,  45,000 of
these warrants had been earned.  In connection  with the receipt of a production
payment,  in October 1996 the Company  issued  25,000  warrants with an exercise
price of $5.18 expiring October 1999,  25,000 warrants with an exercise price of
$5.65 expiring  October 2000 and 25,000 warrants with an exercise price of $6.13
expiring October 2001. No warrants were exercised in 1996. 

     At December 31, 1996,  the Company had  1,176,676  total  warrants  issued,
including the publicly traded warrants. Additionally, in 1996, 610,170 shares of
the Company's  common stock that had been held as  collateral  were returned and
held in the treasury, 12,258 shares of common stock were issued upon exercise of
employees  stock options,  239,710  shares of common stock,  valued at $939,000,
were issued to acquire oil and gas properties, and 36,538 shares of common stock
were issued as dividends on the Company's Series C Preferred Stock.

NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION

     During 1995, as more fully  described in Note 3, the Company  issued common
stock and preferred stock valued at $12,495,005 in the acquisition of the assets
from Hunter  Resources,  Inc. Oil and gas  properties  were  acquired by issuing
$1,379,204 of common stock and $22,220 of marketable securities; preferred stock
was  converted  to common  stock;  and  common  stock  was  issued,  creating  a
receivable  from a shareholder of $250. In addition  $17,500 of common stock was
issued as  compensation  to directors and $84,444 of common stock was issued for
services rendered in 1995.

         During 1996,  the Company  purchased oil and gas  properties by issuing
239,710 shares of its common stock,  valued at $938,444.  The Company  converted
658,934 shares of Series B and Series C preferred stock into 1,821,638 shares of
common  stock.  36,538  shares of common stock valued at $121,700 were issued in
lieu  of  cash  dividends  on  preferred  stock.  The  Company  received  equity
securities  with a fair value of  $150,000  as partial  payment  for the sale of
property interests.  Interest paid in 1996 was $2,344,308.





                                      F-20

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11--ENVIRONMENTAL ISSUES

Being  engaged in the oil and gas  exploration  and  development  business,  the
Company  may  become   subject  to  certain   liabilities   as  they  relate  to
environmental  clean  up  of  well  sites  or  other  environmental  restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof.  In the Company's  acquisition  of existing or previously  drilled well
bores, the Company may not be aware of what environmental  safeguards were taken
at the time such  wells  were  drilled  or during  the time that such wells were
operated.  Should it be determined  that a liability  exists with respect to any
environmental  clean up or  restoration,  the liability to cure such a violation
would most likely fall upon the Company.  In certain  acquisitions,  the Company
has received  contractual  warranties  that no such violations  exist,  while in
other  acquisitions the Company has waived its rights to pursue a claim for such
violations  from the selling party.  No claim has been made nor has a claim been
asserted,  nor is the Company aware of the existence of any liability  which the
Company may have, as it relates to any  environmental  clean up,  restoration or
the violation of any rules or regulations relating thereto.

NOTE 12-COMMITMENTS AND CONTINGENCIES

         The Company assumed in the Hunter  acquisition lease agreements for the
use of office space and office equipment. The office space lease extends through
November  2001 with an option to renew  the  lease for a three  year  term.  The
various  office  equipment  leases  extend  until  1999.  The  leases  have been
classified as operating  leases.  The following is a schedule by years of future
minimum lease payments required under the operating lease agreements:

Year Ended December 31:
1997..................................................$183,046
1998.................................................. 173,168
1999.................................................. 169,815
2000.................................................  173,711
2001.................................................  159,235
Thereafter...........................................        0
                                                      -------- 
 Total Minimum Payments Required......................$858,975
                                                      ========

         Rental  expense  was  $129,169  and  $61,191  for  1996  and  1995,
respectively.

         At December 31, 1996, the Company is involved in litigation proceedings
arising in the normal course of business. The Company has accrued $87,750 as of
December 31, 1996 for  potential  expenses to be incurred in  settlement  of the
litigation.  In the opinion of management,  any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition, cash flows or results of operations.



                                      F-21

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13-FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

         Financial  instruments  that subject the Company to credit risk consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from  individual oil and gas investors.
These parties are primarily  located in the  Southwestern  regions of the United
States.  No single  receivable is considered to be  sufficiently  material as to
constitute a concentration.  The Company does not ordinarily require collateral,
but in the case of receivables for joint  operations,  the Company often has the
ability to offset amounts due against the participant's share of production from
the related  property.  The Company believes the allowance for doubtful accounts
at December 31, 1996 and 1995 is adequate.

     Management  estimates  the market  values of notes  receivable  and payable
based on  expected  cash flows and  believes  those  market  values  approximate
carrying  values at  December  31,  1996 and 1995.  The market  values of equity
investments are based upon quoted prices (see Note 1).

NOTE 14--COMMODITY DERIVATIVES AND HEDGING ACTIVITIES

     Periodically,  the Company enters into futures, options, and swap contracts
to reduce the effects of  fluctuations  in crude oil and natural gas prices.  At
December  31,  1996,  the Company had open  contracts  for oil price  collars on
12,000 barrels of oil per month (with cap and floor prices of $22.20 and $18.00,
respectively)  through  February 1997 and 15,000  barrels of oil per month (with
cap and floor prices of $25.10 and $20.00, respectively) from March 1997 through
August,  1997.  At December 31,  1996,  the Company had open  contracts  for gas
prices swaps of 302,000 Mmbtu of gas per month at $2.16 per Mmbtu during January
1997,  100,000  Mmbtu of gas per month at $1.905  per Mmbtu from  February  1997
through  January  1998 and another  100,000  Mmbtu of gas per month at $1.77 per
Mmbtu from February 1997 through January 1998. These contracts  expire monthly
as indicated  above. The gains or losses on the Company's  hedging  transactions
are  determined  as the  difference  between the contract  price and a reference
price,  generally  closing prices on the NYMEX. The resulting  transaction gains
and losses are  determined  monthly  and are  included  in the period the hedged
production or inventory is sold. Net losses  relating to these  derivatives  for
the years ended December 31, 1996 and 1995 were $272,000 and none, respectively.

NOTE 15--STOCK COMPENSATION PLAN

     The Company adopted in 1996 two stock  compensation plans for its employees
and directors,  (i) the Magnum Hunter  Resources  Employee Stock Ownership Plan,
(the "ESOP"),  and (ii) the Magnum Hunter  Resources,  Inc. 1996 Incentive Stock
Option Plan.  In  addition,  the Company  authorized  the issuance of its Common
Stock to  participants  in the Magnum Hunter  Resources,  Inc. 401(k) plan in an
amount that matched employee contributions up to one hundred percent (100%). The
cost of this matching contribution was $59,000 in 1996.

                                      F-22
<PAGE>


     ESOP
     -----

     The Company  established an ESOP and a related trust as a long-term benefit
for its employees.  Under terms of the plan, eligible  participants may elect to
make  elective  deferred  contributions  of not less than 1% of more than 15% of
their annual  compensation,  limited in combination  with the 401(k) plan to the
maximum  allowable per year by the Internal  Revenue Code.  The plan also allows
for the Company to make  Discretionary  Contributions to the ESOP, but it is not
the intent of the  Company to do so. It is also the  Company's  intent to invest
all  contributions  in Employer Stock. In this regard,  on October 11, 1996, the
Plan purchased  22,556 shares of the Company's  common stock for $3.75 per share
from a third party.  To fund this  purchase,  the Plan  borrowed  $84,585 from a
bank.  Participant  contributions  will be used to  acquire  shares at the price
stated above by retiring the principal and interest of this debt. As of December
31, 1996, no Participant contributions had been made to the ESOP.

     1996 Incentive Stock Option Plan
     --------------------------------

     The Company  established this plan effective April 1, 1996, and is governed
by Section 422 of the Internal Revenue Code, and Section 16(b) of the Securities
Exchange Act of 1934. The Plan covers  1,200,000  shares of the Company's Common
Stock.  Eligibility is limited to employees and directors of the Company and its
subsidiaries.  The  actual  selection  of  grantees  is  made  by the  Board  of
Directors.  The term of the plan is 10 years,  and the term of the options is at
the  discretion  of the Board,  with a term of 5 years.  All  options  are fully
vested and exercisable when granted.  The exercise price is fair market value at
the date of grant,  except for  individuals who own 10% or more of the Company's
stock.


     Prior to 1995,  Hunter had granted  certain of its  employees and directors
options to purchase  its common  shares.  In  connection  with the  merger,  the
Company has  substituted the Hunter options with 264,558 options under the Plan,
239,022 of which have an exercise price of $.73425 per share and 25,536 of which
have an exercise price of $1.65 per share. During 1996, 12,258 of these options
were  exercised.  In addition,  during  1996,  the Board  granted the  remaining
935,442  options to employees  and  directors at an exercise  price of $4.50 per
share.  


                                      F-23
<PAGE>

     The following is a summary of stock option activity under the Plan:

<TABLE>
<CAPTION>
                                                             1996                          1995
                                                   ---------------------------   ------------------------------
<S>                                               <C>          <C>                 <C>          <C>

                                                               Weighted Average                 Weighted Average
                                                  Shares       Exercise Price     Shares        Exercise Price
                                                ----------     ----------------  ---------     -----------------
Outstanding - Beginning of Year                   264,558        $   0.82         264,558       $   0.82
Granted                                           935,442            4.50            -               -
Exercised                                         (12,258)            .73            -               -
Cancelled                                            -                -              -               -
                                                ----------        --------        -------         -------
Outstanding - End of Year                       1,187,742        $   3.72         264,558       $   0.82
                                                ==========       =========        ========      =========

</TABLE>

     The  following is a summary of plan stock options  outstanding  at December
31, 1996:
<TABLE>
<CAPTION>

               Exercise       Number of      Weighted Average         Number of
               Price          Options        Remaining Contractual    Exercisable
                              Outstanding    Life (Years)             Options
               ---------      -----------    ---------------------    -------------
<S>            <C>            <C>            <C>                      <C>            
               $   .73           226,764         1.0                     35,242
                  1.65            25,536         3.0                       -
                  4.50           935,442         4.3                    935,442
                                ---------                               ---------
                               1,187,742                                970,684
                              ===========                               =========

</TABLE>     

     The Company  adopted  the  disclosures  only  portion of SFAS No. 123 as it
continued to follow the  provisions of APB No. 25, which is the intrinsic  value
method of accounting for stock-based compensation.
                                                                                
     On a pro forma  basis,  the  effect  of stock  based  compensation  had the
Company adopted Statement No. 123 is as follows:

                                                                  1996
                                                                  ----
     Net Income (Loss):                 As reported               103,000
                                        Pro Forma              (1,540,000)

     Primary Earnings per Share:        As Reported                 .01
                                        Pro Forma                  (.12)

     Fully Diluted Earnings per Share:  As Reported                 .01
                                        Pro Forma                  (.12)

     The weighted average grant date fair value of options granted was $2.56 and
of warrants  granted was $1.09 during  1996.  Fair value of options and warrants
was  calculated  by using the  Black-Scholes  options  pricing  model  using the
following  weighted  average  assumptions for 1996 activity:  risk free interest
rate of 5.74%,  expected life of 4.28 years, expected volatility of 60.8% and no
divided yield.

NOTE  16--SUBSEQUENT
EVENTS

     In January,  1997, the Company  purchased a fifty percent (50%) interest in
the McLean Gas Plant,  the gas  processing  facility  connected to the Company's
Panoma gas gathering system for $2.5 million.

                                      F-24

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Under the terms of the purchase agreement, the Company will receive 100% of
the net profits of the plant until it receives the $2.5 million  purchase price,
at which point its net profits  interest will revert to fifty percent (50%), the
Company's ownership  position.  The acquisition was funded through the Company's
revolving credit agreement with certain banks.

     In February,  1997,  the Company  entered into a definitive  agreement with
Burlington Resources,  Inc. to acquire for $143.5 million,  effective January 1,
1997,  the Permian Basin  Properties  consisting of 25 field areas in West Texas
and 21  field  areas  in  Southeast  New  Mexico  containing  3,100  oil and gas
completions.  Management of the Company  believes the Permian  Basin  Properties
will provide significant  opportunities for exploitation of both oil and natural
gas  reserves  through a  combination  of  enhanced  recovery  projects  and new
drilling prospects.

     In accordance with the definitive acquisition agreement, the Company made a
performance  deposit of $10 million  against the $143.5 million  purchase price,
which will be further reduced by  approximately  $8 million to take into account
production  between January 1, 1997 and the closing date. The Company intends to
fund the Permian Basin  Acquisition  with (i) monies  borrowed  under a new $150
million credit facility with certain banks, for which the Company has received a
commitment letter, and (ii)approximately $50,000,000 in convertible subordinated
discount notes which the Company plans to offer to institutional investors under
Rule 144A.  The new credit  facility has a borrowing  base of $145 million and
will replace the Company's $100 million existing credit facility.  The Company's
obligation  under the  definitive  acquisition  agreement  is not  subject  to a
financing  condition,  and it is likely  the  Company  would  default  under the
acquisition  agreement if the New Credit Facility or other adequate financing is
not arranged on a timely basis.  The closing of the Permian  Basin  Acquisition,
which is expected  to occur on or before  April 30,  1997,  is  conditioned,  in
Burlington's  case,  upon the  approval  of its board of  directors  and, in the
Company's case, upon the satisfactory  results of its due diligence with respect
to accounting, title and environmental matters.


NOTE 17--EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS

     Mr. Gary C. Evans and Mr. Matthew C. Lutz have  employment  agreements with
Magnum Hunter Resources,  Inc. Mr. Evans' agreement terminates December 31, 1997
and continues  thereafter on a year to year basis and provides for a base salary
of $200,000 per annum.  Mr. Lutz's agreement  terminates  September 30, 1997 and
continues  thereafter  on a year to year basis and provides for a base salary of
$100,000 per annum.  Both agreements  provide that the same benefits supplied to
other  Company  employees  shall be available to the  employee.  The  employment
agreements also contain,  among other things,  covenants by the employee that in
the event of  termination,  he will not associate  with a business that competes
with the Company for a period of one year after  cessation  of  employment.  The
Company  also  has  key  man  life  insurance  on Mr.  Evans  in the  amount  of
$1,000,000.

                                      F-25

<PAGE>




                  MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARY
          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
                                   (UNAUDITED)

         Proved oil and gas reserves  consist of those  estimated  quantities of
crude oil,  natural gas, and natural gas liquids that geological and engineering
data  demonstrate  with  reasonable  certainty to be recoverable in future years
from known reservoirs under existing economic and operating  conditions.  Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

         Estimates of petroleum reserves have been made by independent engineers
and Company  employees.  These estimates  include  reserves in which the Company
holds an economic interest under production-sharing and other types of operating
agreements.  These estimates do not include probable or possible  reserves.  The
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the  limitations  inherent in such  estimation.
The  process  of  estimating  reserves  is  subject  to  continual  revision  as
additional  information  becomes  available  as a result of  drilling,  testing,
reservoir  studies and production  history.  There can be no assurance that such
estimates will not be materially revised in subsequent periods.

         Estimated quantities of proved oil and gas reserves of the Company were
as follows:
<TABLE>
<CAPTION>

                                                                                                         Natural Gas
                                                                                        Oil               (Thousand
                                                                                     (Barrels)           Cubic Feet)
                                                                                ----------------------------------------------------
<S>                                                                             <C>                      <C>

December 31, 1996
     Proved reserves.........................................................            5,338,255           90,565,997
     Proved developed reserves...............................................            1,962,184           71,275,141
                                                                                
December 31, 1995
     Proved reserves.........................................................            3,767,739           14,071,916
     Proved developed reserves...............................................            1,681,841            8,796,748
                                                                                


         The changes in proved reserves for the year ended December 31, 1996 and
1995 were as follows:
                                                                                                         Natural Gas
                                                                                        Oil               (Thousand
                                                                                     (Barrels)           Cubic Feet)
                                                                                ----------------------------------------------------

Reserves at December 31, 1994................................................             1,260,520            4,914,207

Purchase of minerals-in-place................................................             3,122,382           10,973,298
Extensions and  discoveries..................................................                38,498              564,247
Production...................................................................               (29,972)            (102,056)
Revisions of estimates.......................................................              (623,689)          (2,277,780)
                                                                                ----------------------------------------------------
Reserves at December 31, 1995................................................             3,767,739           14,071,916
                                                                                ----------------------------------------------------
Purchase of minerals-in-place................................................             2,678,579           81,943,557
Sale of minerals-in-place....................................................              (214,381)          (1,318,164)
Extensions and discoveries...................................................                                    151,606
Production...................................................................              (191,203)          (2,674,793)
Revisions of estimates.......................................................              (702,479)          (1,608,125)
                                                                                ----------------------------------------------------
Reserves at December 31, 1996................................................             5,338,255           90,565,997
                                                                                ====================================================


</TABLE>
                                      F-26
<PAGE>


                      MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARY
          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
                                   (UNAUDITED)


         The  aggregate  amounts of  capitalized  costs  relating to oil and gas
producing  activities and the related  accumulated  depreciation,  depletion and
impairment as of December 31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                                                                1996            1995
                                                                       ---------------------------------------
<S>                                                                     <C>                    <C>
Unproved oil and gas properties.......................................   $   459,254           $  842,889
Proved properties.....................................................    70,574,890           36,256,428
                                                                       ---------------------------------------
Gross Capitalized Costs...............................................    71,034,144           37,099,317

Accumulated depreciation, depletion and impairment....................    (4,513,541)          (1,914,602)
                                                                       ----------------------------------------
Net Capitalized Costs.................................................
                                                                        $  66,520,603       $  35,184,715
                                                                        =======================================

     Costs incurred in oil and gas producing  activities,  both  capitalized and
expensed, during the years ended December 31, 1996 and 1995 were as follows:
                                                                                1996                  1995
                                                                       ----------------------------------------
Property acquisition costs
     Proved properties................................................    $ 31,982,821       $     27,983,521
     Unproved properties..............................................              -                 142,545
     Exploration costs................................................       1,114,733                340,411
Development costs.....................................................         837,273                     -
                                                                       ----------------------------------------
Total Costs Incurred..................................................    $ 33,934,827       $     28,466,477
                                                                       ========================================

     Results of operations  from oil and gas producing  activities for the years
ended December 31, 1996 and 1995 were as follows:
                                                                                1996                 1995
                                                                        ---------------------------------------

Oil and gas production revenue........................................    $ 10,247,688       $        616,596
Disposal services revenue.............................................          20,487                 31,978
Production costs......................................................      (4,389,465)              (267,647)
Depreciation and depletion ...........................................      (2,598,939)              (421,101)
                                                                       ----------------------------------------
Results of Operations for Producing Activities........................    $  3,279,771       $        (40,174)
                                                                       ========================================
</TABLE>


                                      F-27

<PAGE>



                      MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARY
          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
                                   (UNAUDITED)


     The  standardized  measure of  discounted  estimated  future net cash flows
related to proved oil and gas  reserves  at  December  31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>

                                                                                1996                   1995
                                                                        --------------------------------------------
<S>                                                                     <C>                    <C>
Future cash inflows ..................................................   $     492,157,062       $      95,068,694
Future development and production costs................................       (138,614,804)            (37,746,877)
                                                                         -------------------------------------------
Future net cash flows, before income tax...............................        353,542,258              57,321,817
Future income taxes....................................................       (102,341,098)            (11,381,779)
                                                                         -------------------------------------------
Future Net Cash Flows..................................................        251,201,160              45,940,038
10% annual discount....................................................       (134,116,299)            (16,120,359)
                                                                         -------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows...............  $     117,084,861       $      29,819,679
                                                                          ==========================================

     The primary  changes in the  standardized  measure of discounted  estimated
future net cash flows for the years  ended  December  31,  1996 and 1995 were as
follows:
                                                                                      1996                   1995
                                                                        --------------------------------------------
Purchases of minerals-in-place......................................... $      129,544,769       $      30,507,745
Sales of minerals in place.............................................         (2,195,780)                   -
Extensions, discoveries and improved recovery, less related costs......            302,785                  582,001
Sales of oil and gas produced, net of production costs.................         (5,858,223)                (350,083)
Revision of prior estimates:
   Net change in price and costs.......................................         14,993,539                4,864,688
     Change in quantity estimates......................................        (10,107,737)              (7,637,000)
Accretion of discount..................................................          2,981,968                  623,512
Net change in income taxes.............................................        (42,396,139)              (5,006,300)
                                                                        --------------------------------------------
Net Change............................................................. $       87,265,182       $       23,584,563
                                                                        ============================================
</TABLE>

   Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves.  Estimated future development
and  production  costs are  determined  by  estimating  the  expenditures  to be
incurred in developing  and producing the proved oil and gas reserves at the end
of the year,  based on  year-end  costs and  assuming  continuation  of existing
economic  conditions.  Estimated  future  income tax  expense is  calculated  by
applying year-end statutory tax rates to estimated future pre-tax net cash flows
related to proved  oil and gas  reserves,  less the tax basis of the  properties
involved.

   The assumption used to compute the standardized  measure are those prescribed
by the Financial  Accounting  Standards  Board and as such,  do not  necessarily
reflect the Company's  expectations  of actual revenues to be derived from those
reserves  nor their  present  worth.  The  limitations  inherent  in the reserve
quantity  estimation process are equally applicable to the standardized  measure
computations since these estimates are the basis for the valuation process.


                                      F-28

<PAGE>

                                    EXHIBIT 1

                           SUBSIDIARIES OF REGISTRANT

     Cushing Disposal, Inc.

     Gruy Petroleum Management Company

     Hunter Butcher  International  Limited Liability Company, a Wyoming limited
       liability company

     Hunter Gas Gathering, Inc.

     Inesco Corporation

     Magnum Hunter  Production,  Inc.

     Midland Hunter  Petroleum  Limited  Liability  Company,  a Wyoming  limited
        liability company

     SPL Gas Marketing, Inc.

                                      F-29


<PAGE>

                                    EXHIBIT 11
                        COMPUTATION OF PER SHARE EARNINGS

<TABLE>
<CAPTION>


                                                                       Year Ended December 31,
                                                                    1996            1995
                                                           (In thousands, except share and per share amounts)
<S>                                                         <C>                 <C>
                                                         -------------------------------------------
Net income (loss)                                        $       103             $        (1,585)
                                                         ===========================================
Calculation of primary earnings (loss) per share:
Weighted average shares outstanding                          12,485,893                5,606,669
Common stock equivalents (options & warrants)                      *                        *
                                                         -------------------------------------------

Total weighted average shares outstanding                    12,485,893                5,606,669
                                                         ===========================================

Net income (loss) per share                               $       .01           $           (.28)
                                                         ===========================================

Calculation of fully diluted earnings (loss) per share:

Weighted average shares outstanding                         12,485,893                5,606,609
Common stock equivalents (options & warrants)                      *                       *
                                                          ------------------------------------------
Total weighted average shares outstanding                   12,485,893                5,606,609
                                                         ===========================================
Net income (loss) per share                               $       .01           $           (.28)
                                                         ===========================================

</TABLE>

         * Excluded as such amounts are anti-dilutive.

                                      F-30
<PAGE>


     Item  8.Changes In and  Disagreements  With  Accountants  on Accounting and
             Financial Disclosure.

    The accounting firm of Hein + Associates,  L.L.P.  ("Hein") represented the
Company as its independent accountants during fiscal year 1995 and was dismissed
by the  Company's  Board of Directors on January 20, 1997.  During the Company's
fiscal year ended December 31, 1995 and subsequent interim period, there were no
disagreements  between  the  Company  and  Hein  on  any  matter  of  accounting
principals or practices,  financial statement  disclosure,  or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Hein, who
would have caused it to make reference to the subject matter of the disagreement
in connection  with its reports.  Hein's reports on the financial  statements of
the  Company  for the fiscal  year ended  December  31,1995  did not  contain an
adverse opinion or disclaimer of opinion,  and were not qualified or modified as
to  uncertainty,  audit scope or accounting  principles.  The Company's Board of
Directors  appointed  Deloitte  & Touche  LLP  as the  Company's  independent
accountants for fiscal year 1996 on January 20,1997.



                                       30

<PAGE>

                                    PART III


     Item 9.  Directors,  Executive  Officers,  Promoters  and Control  Persons;
              Compliance with Section 16(a) of the Exchange Act

The  following  table sets forth the  directors,  executive  officers  and other
significant employees of the Company,  their ages, and all offices and positions
with  the  Company.  Each  director  is  elected  for a  period  of one year and
thereafter serves until his successor is duly elected by the stockholders of the
Company and qualifies.
<TABLE>
<CAPTION>

<S>                                                                <C>       <C>
 Name                                                               Age      Title


Gary C. Evans.....................................................  39       Director, President, Chief
                                                                                  Executive Officer and Chief
                                                                                  Financial Officer
Matthew C. Lutz...................................................  63       Chairman of the Board and
                                                                                 Executive  Vice
                                                                                  President of Exploration
                                                                                  and Business Development
David S. Krueger..................................................  47       Vice President and Chief
                                                                                  Accounting Officer
Gerald W. Bolfing.................................................  66       Director
Oscar C. Lindemann................................................  74       Director
Lloyd T. Rochford.................................................  50       Director
James E. Upfield..................................................  75       Director
</TABLE>
   Gary C. Evans has served as President, Chief Executive Officer and a director
of the Company since December 31, 1995 and Chairman and Chief Executive  Officer
of all of the Hunter  Subsidiaries since their formation or acquisition.  He has
served as Chief  Financial  Officer  since  January  1997. He acted as Chairman,
President  and Chief  Executive  Officer  of Hunter  from  September  1992 until
October 1996. Previously, he was President and Chief Operating Officer of Hunter
from December  1990 to September  1992.  From 1985 to 1990,  Mr. Evans served as
President and CEO of Sunbelt Energy,  Inc. and its  subsidiaries  prior to their
merger with Hunter  Resources,  Inc. From 1981 to 1985, Mr. Evans was associated
with the  Mercantile  Bank of Canada where he held various  positions  including
Vice  President and Manager of the Energy  Division of the  Southwestern  United
States.  As an oil and gas lending  officer of a $4.5 billion  Canadian bank, he
initiated and managed an energy loan  portfolio in excess of $125 million.  From
1978 to 1981,  he served in various  capacities  with  National Bank of Commerce
(now BankTexas,  N.A.) including  Credit Manager and Credit Officer.  Mr. Evans
serves on the Board of  Directors  of Karts  International  Incorporated  an OTC
traded company, and Digital Communications  Technology Corporation,  an American
Stock Exchange listed company.

                                       31

<PAGE>


     Matthew C. Lutz was  appointed  Chairman of the Board on March 31, 1997 and
has served as Vice  Chairman  and  Business  Development  Manager of the Company
since  December  31,  1995.  Mr. Lutz held  similar  positions  with Hunter from
September  1993 until October 1996.  From 1984 through 1992, Mr. Lutz was Senior
Vice  President  of  Exploration  and on  the  Board  of  Directors  of  Enserch
Exploration,  Inc. with  responsibility for such company's worldwide oil and gas
exploration and development program. Prior to joining Enserch, Mr. Lutz spent 28
years with Getty Oil Company. He advanced through several technical, supervisory
and  managerial  positions  which gave him  various  responsibilities  including
exploration,   production,  lease  acquisition,   administration  and  financial
planning.

   David S. Krueger has served as Chief Accounting  Officer of the Company since
January  1997.  Mr.  Krueger  acted as Vice  President--Finance  of Cimarron Gas
Holding Co., a natural gas processing and natural gas liquids  marketing company
in Tulsa,  Oklahoma,  from  April  1992 until  January  1997.  He served as Vice
President/Controller  of American  Central Gas  Companies,  Inc.,  a natural gas
gathering,  processing  and  marketing  company  from May 1988 until April 1992.
Prior to that time,  Mr.  Krueger  served in various  managerial  capacities for
Southland  Energy  Corporation.  Mr.  Krueger,  a certified  public  accountant,
graduated  from the  University of Arkansas with a B.S./B.A.  degree in Business
Administration  and  earned  his  M.B.A.  from the  University  of Tulsa.  After
obtaining his undergraduate  degree, Mr. Krueger was employed by Arthur Anderson
& Company for three years.

     Gerald W.  Bolfing has been a director of the Company  since  December  31,
1995.  Mr.  Bolfing was  appointed a director of Hunter in August 1993. He is an
investor  in the oil and gas  business  and a past  officer  of one of  Hunter's
former  subsidiaries.  From 1962 to 1980,  Mr.  Bolfing was a partner in Bolfing
Food Stores of Waco,  Texas.  During this time, he also joined American  Service
Company  in  Atlanta,  Georgia  from 1964 to 1965,  and was  active  with  Cable
Advertising  Systems,  Inc. of  Kerrville,  Texas from 1978 to 1981. He joined a
Hunter  subsidiary's  well servicing  business in 1981 where he remained  active
until its  divestiture  in 1992.  Mr.  Bolfing is on the board of  directors  of
Capital Marketing Corporation of Hurst, Texas.

     Oscar C.  Lindemann has served as a director of the Company since  December
31,  1995.  Mr.  Lindemann  was  previously  a director  of Hunter,  having been
appointed in November  1995. Mr.  Lindemann has over 40 years  experience in the
financial  industry.  Mr. Lindemann began his banking career with the Texas Bank
and Trust in  Dallas,  Texas in 1951.  He  served  the bank  until  1977 in many
capacities,  including Chief Executive Officer and Chairman of the Board.  Since
leaving Texas Bank and Trust,  he has served as Vice Chairman of both the United
National Bank and the National Bank of Commerce,  also in Dallas.  Mr. Lindemann
has also  served as a  consultant  to the  banking  industry.  He  retired  from
commercial  banking in 1987.  Mr.  Lindemann is a former  President of the Texas
Bankers  Association,  and a former state representative to the American Bankers
Association.  He was a Founding  Director and Board Member of VISA, and a member
of the Reserve City Bankers Association.  He has served as an instructor at both
the Southwestern Graduate

                                       32

<PAGE>



School of Banking at S.M.U.  and the School of Banking of the South at L.S.U. He
has also served as a faculty member for four years in the College of Business at
the University of Texas in Austin teaching various banking subjects.

   Lloyd T. Rochford has served as a director since February 10,1989.  He served
as Chairman of the Board from December 31, 1995 to March 31, 1997. He previously
served as President and a director of the Company from February 10, 1989 through
December 31, 1995. During a portion of this time and prior thereto, Mr. Rochford
managed his own private  investments  and operated a private  company engaged in
the finding, producing and developing of oil and gas properties

     James E. Upfield has served as a director of the Company since December 31,
1995. Mr. Upfield was appointed a director of Hunter in August 1992. Mr. Upfield
is Chairman of Temtex Industries,  Inc. based in Dallas, Texas, a public company
traded on NASDAQ that produces  consumer hard goods and building  materials.  In
1969,  Mr.  Upfield  served on a select  Presidential  Committee  serving postal
operations of the United States of America. He later accepted the responsibility
for the Dallas region, which encompassed Texas and Louisiana. From 1959 to 1967,
Mr. Upfield was President of Baifield Industries and its predecessor,  a company
he founded in 1949 which merged with  Baifield in 1963.  Baifield was engaged in
prime  government   contracts  for  military  systems  and  sub-systems  in  the
production of high  strength-  light weight metal  products.  In 1967,  Baifield
Industries,  Inc. was acquired by Automatic  Sprinkler  Corporation  of America,
where Mr.  Upfield  remained  until  resigning in 1968 to pursue other  business
opportunities.

   Significant Officers of Subsidiaries.

   Richard R. Frazier,  age 50, has been President of Magnum Hunter  Production,
Inc. and Chief  Operating  Officer of Magnum  Hunter  Production,  Inc. and Gruy
Petroleum  Management Company since January 1994. From 1977 to 1993, Mr. Frazier
was with Edisto  Resources  Corporation  in Dallas,  serving as  Executive  Vice
President  Exploration  and Production  from 1983 to 1993,  where he had overall
responsibility for its property acquisition,  exploration, drilling, production,
gas marketing and  engineering  functions.  He has been  responsible  for hiring
staff and  coordinating  efforts to  evaluate,  purchase  and operate  over $400
million in oil and gas properties,  consisting of 2,200 wells in 19 states. From
1972 to 1976,  Mr.  Frazier  served as District  Production  Superintendent  and
Petroleum Engineer with HNG Oil Company (Now Enron Oil & Gas) in Midland, Texas.
Mr.  Frazier's  initial  employment,  from 1968 to 1971,  was with  Amerada Hess
Corporation as a petroleum  engineer  involved in numerous  projects in Oklahoma
and  Texas.  Mr.  Frazier  graduated  in 1970 from  University  of Tulsa  with a
Bachelor  of  Science  Degree  in  Petroleum  Engineering.  He  is a  registered
Professional  Engineer in Texas and a member of Society of  Petroleum  Engineers
and many other professional organizations.


                                       33

<PAGE>



     R. Renn Rothrock,  Jr., age 54, has been Executive Vice President of Hunter
and  President  of Gruy since  January  1994 after  serving  as  Executive  Vice
President and Chief Operating  Officer from May 1988. Mr. Rothrock was Executive
Vice President and General  Manager of Gruy  Engineering  Corporation  from 1986
until May 1988.  Over his  28-year  career,  Mr.  Rothrock  has also served as a
reservoir engineer and operations research engineer at Skelly Oil Company and as
an area engineer at Amerada  Petroleum  Corporation;  the Engineering  Editor of
Petroleum Engineer International  Magazine; Vice President and Energy Manager of
the First National Bank of Mobile,  Alabama;  Executive Vice President of Energy
Assets  International  Corporation,  a public  company that financed oil and gas
ventures;   and  the  producer  and  operator  of  his  own  gas  gathering  and
transportation   system.   Mr.  Rothrock  earned  a  B.S.  degree  in  Petroleum
Engineering and an M.S.  degree in Engineering  from the University of Oklahoma.
He is a member of the Society of Professional Engineers, the National Society of
Professional Engineers, the National Academy of Forensic Engineers and the Texas
Society of Professional  Engineers.  Mr.  Rothrock is a registered  Professional
Engineer in Texas and Oklahoma.

     R. Douglas Cronk,  age 50, has been Vice President of Operations for Magnum
Hunter Production,  Inc. since May 1996, at which time the Company acquired from
Mr.  Cronk  100% of the  capital  stock of  Rampart  Petroleum,  Inc.,  based in
Abilene,  Texas. Rampart has been an active operating and exploration company in
the North Central and West Texas region since 1983. Upon acquisition of Rampart,
the Company assumed Rampart's  operations of over 50 producing oil and gas wells
in West Texas.  Prior to the formation of Rampart,  Mr. Cronk was an independent
oil and gas consultant in Houston,  Texas for approximately two years. From 1974
to  1981,  Mr.  Cronk  held  various  positions  with  subsidiaries  of  Deutsch
Corporation  of Tulsa,  Oklahoma,  including  Southland  Drilling and Production
where he became  Vice  President  of Drilling  and  Production.  Mr.  Cronk is a
Chemical Engineer graduate from the University of Tulsa.

   Russell A. Tally,  age 64, has been  Executive  Vice  President  and Drilling
Manager of Gruy Petroleum  Management  Company since January 1991.  From 1959 to
1970,  Mr.  Talley  worked for Diamond  Shamrock  Oil & Gas Company in Amarillo,
Texas,  where he had substantial  responsibilities  in drilling,  production and
workover programs.  He supervised  operations for more than 300 properties,  and
drilled  and  completed  wells  in the  predominant  oil and gas  basins  of the
Mid-Continent  region and  portions  of Canada.  From 1970 to 1985,  Mr.  Talley
worked for  Samedan  Oil  Corporation  in  Houston,  Texas,  where he became the
Manager of  Offshore  Drilling  and  Production.  He managed  all  domestic  and
Canadian drilling operations and supervised international operations in Ecuador,
the North Sea and Canada.  From 1985 to 1987,  Mr. Talley was Vice  President of
Operations for Seagull Energy E & P, Inc. in Houston,  where he was  responsible
for all onshore and offshore drilling operations. In 1988 he established Texstar
Energy Operators, Inc., which was acquired by Gruy in 1991.


                                       34

<PAGE>




Item 10.          Executive Compensation.

   The  following   table  contains   information   with  respect  to  all  cash
compensation  paid or accrued by the Company  during the past three fiscal years
to the Chief  Executive  Officer of the Company.  No other officer  individually
received  annual  cash  compensation  exceeding  $100,000  during the past three
years.
<TABLE>
<CAPTION>

                                                                                   Long Term Compensation
                                    Annual Compensation                             Awards           Payouts
(a)                   (b)           (c)          (d)        (e)              (f)            (g)      (h)           (i)
<C>                   <C>          <C>          <C>       <C>                <C>            <C>      <C>           <C>
Name,                 Year          Salary       Bonus      Other                           Number
Principal                                                   Annual           Restricted     Options  LTP           All Other
Position                                                    Compensation     Stock          SARs     Payouts       Compensation

Gary C. Evans         1996          $150,000     $100,000   -                -              -        -             -
President and CEO

Richard R. Frazier    1996          $ 98,350     $  9,000   -                -              -        -             -
President of Magnum
Hunter Production, Inc.

L.T. Rochford         1995          $ 96,000     -0-        $15,693          -              -        -             -
CEO

</TABLE>

     From April 1992  through the first half of 1995,  the Company  provided Mr.
Rochford  with a  vehicle  and has paid the  insurance  thereon.  Such  payments
amounted to approximately $17,389, $18,421 and $8,870 for the fiscal years ended
December 31, 1993, 1994 and 1995,  respectively.  Pursuant to a Letter Agreement
dated July 21, 1995,  Mr.  Rochford  continued to receive a salary of $8,000 per
month until December 31, 1996.  Additionally  Mr. Rochford was provided with the
same  benefits as other  employees  including  health  insurance  coverage,  the
premiums of which totaled $6,823 for the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>

                                         Option/SAR Grants in Last Fiscal Year
                                                  (Individual Grants)

                                              Number of        Percent of total
                                              Securities       options/SARs        Exercise of        Expiration
                  Name                        Underlying       granted to          base price         date
                                              Options/SARs     employees in        ($/Sh)
                                              granted (#)      fiscal year

                   (a)                            (b)                 (c)                 (d)               (e)
<S>                <C>                       <C>                 <C>                  <C>               <C>
Gary C. Evans                                 100,000                  10%               $4.50          12/5/2001
Richard R. Frazier                             75,000                   8%               $4.50          12/5/2001
</TABLE>

                                     35

<PAGE>




Compensation of Directors

         The Company has six individuals  who serve as directors,  four of which
are independent.  Two of these directors  receive  compensation  with respect to
their services and in their capacities as executive  officers of the Company and
no additional  compensation has historically been paid for their services to the
Company as directors.  The other four directors of the Company are not employees
of the Company and receive no compensation for their services as directors other
than as stated  below.  Two former  directors  received  5,000  shares of common
stock,  valued at $3.50 per share, as  compensation  for their services in 1995.
For  1996,  directors  received  $500 per  meeting  as  compensation  for  their
services. Other than the compensation stated herein, the Company has not entered
into any arrangement,  including consulting  contracts,  in consideration of the
director's service on the board.

     Employment  Contracts and  Termination of Employment and  Change-in-Control
     Arrangements

     Mr. Gary C. Evans and Mr. Matthew C. Lutz have  employment  agreements with
Magnum.  Mr.  Evans'  agreement  terminates  December  31,  1997  and  continues
thereafter  on a year to year basis and  provides  for a salary of $200,000  per
annum.  Mr.  Lutz's  agreement  terminates  September  30,  1997  and  continues
thereafter  on a year to year basis and  provides  for a salary of $100,000  per
annum.  Both agreements  provide that the same benefits supplied to other Magnum
employees  shall be available to the employee.  The employment  agreements  also
contain,  among other  things,  covenants by the  employee  that in the event of
termination, he will not associate with a business that competes with Magnum for
a period of one year after cessation of employment. Magnum also has key man life
insurance on Mr. Evans in the amount of $1,000,000.

         The Company has not entered into any contracts or arrangements with any
named  executive  officer  which would  provide such  individual  with a form of
compensation  resulting from such  individual's  resignation,  retirement or any
other termination of such executive officer's employment with the Company or its
subsidiary,  or from a change-in-control of the Company or a change in the named
executive officer's responsibilities following a change-in-control.

Item 11.         Security Ownership of Certain Beneficial Owners and Management.

Security Ownership

         The  following  table sets forth  certain  information  as of March 24,
1997,  regarding the share  ownership of the Company by (i) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock of the Company,  (ii) each director,  (iii) the Company's  Chief
Executive Officer and the two other most highly  compensated  executive officers
of the Company, and (iv) all directors and executive officers of the Company, as
a group.  None of the directors or executive  officers named below owned,  as of
March 24, 1997, any shares of the Company's Series A Preferred Stock or its 1996
Series A Convertible Preferred Stock. The business

                                       36

<PAGE>



address of each  officer and director  listed  below is: c/o Magnum  Hunter
Resources, Inc., 600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039.



<TABLE>
<CAPTION>


                                                                                     Common Stock
                                                                                  Beneficially Owned

                                                                           Number of                    Percent
                             Name                                           Shares                   of Class (4)
<S>                                                                        <C>                      <C>
Directors and Executive Officers
   Gary C. Evans...............................................             1,653,060 (1)               12.06
   Matthew C. Lutz..............................................              145,460                    1.06
   Gerald W. Bolfing...........................................               323,144                    2.36
   Oscar C. Lindemann..........................................                 1,185                      *
   James E. Upfield............................................                29,268                      *
   Lloyd T. Rochford...........................................               541,939 (2)                 4.0
   Richard R. Frazier..........................................               47, 745                      *
   All directors and executive officers as a group (8 persons)              2,741,801                   19.78

Beneficial owners of 5 percent or more (excluding persons named
above)
   TCW Group, Inc.
   865 South Figueroa Street
   Los Angeles, CA  90017......................................

                                                                            1,702,127 (3)               11.05
------------------
*Less than 1%
</TABLE>


     (1)  Includes   17,024  shares  held  in  the  name  of  Jacquelyn   Evelyn
Enterprises,  Inc., a corporation whose sole shareholder is Mr. Evans' wife. Mr.
Evans  disclaims any ownership in such  securities  other than those in which he
has an economic interest.

     (2)  Includes  150,000  shares  subject to  currently  exercisable  options
pursuant to a stock option agreement between Mr. Rochford and the Company.

     (3) Consists of shares attributable to shares of Common Stock issuable upon
conversion  of  1,000,000  shares of the  Company's  1996  Series A  Convertible
Preferred Stock.

     (4) Percentage is calculated on the number of shares outstanding plus those
shares deemed outstanding under Rule 13d-3(d)(1) under the Exchange Act.



Item 12.          Certain Relationships and Related Transactions.

     During 1996, as part of the Company's  overall  compensation  package,  the
Company's  officers  and  directors  were  granted the right to  participate  in
certain development and exploration projects of the Company on a promoted basis.
As of December 31, 1996, eleven (11) of the Company's  officers and directors as
a group spent an aggregate  of $137,340  participating  in 6 wells.  The Company
discontinued this program as of January 1, 1997.

                                       37

<PAGE>
<TABLE>
<CAPTION>



Item 13.          Exhibits and Reports on Form 8-K.
                                                                                        Page
         (a) Exhibits                                                                   Numbering
                                                                                        Sequential
<S>               <C>                       <C>                                           <C>
                  3.1 & 4.1                 Articles of Incorporation                            *
                  3.2 & 4.2                 Articles of Amendment                                **
                  3.3 & 4.3                 Articles of Amendment                                ***
                  3.4 & 4.4                 By-Laws, as Amended                                  ***
                  3.5 & 4.5                 Certificate of Designation, of
                                            1996 Series A Preferred Stock                        *******
                  10.1                      Agreement and Plan of Reorganization and             *****
                                            Plan of Liquidation
                  10.2                      Amendment to Agreement and Plan of                   ****
                                            Reorganization and Plan of Liquidation
                  10.3                      Employment Agreement for Gary C. Evans                ****
                  10.4                      Employment Agreement for Matthew C. Lutz              ****
                  10.5                      Credit Agreement dated June 28, 1996
                                            among Wells Fargo Bank (Texas), N.A. et al
                                            and the Company                                      ****
                  10.6                      Purchase and Sale Agreement, dated May 17, 1996
                                            between Meridian Oil, Inc. and
                                            ConMag Energy Corporation                            ******
                  10.7                      Stock Purchase Agreement among Magnum
                                            Petroleum, Inc. and Trust Company of the
                                            West and TCW Asset Management Company,
                                            in the capacities described herein, TCW Debt
                                            and Royalty Fund IVB and TCW Debt and
                                            Royalty Fund IVC, dated as of December 6, 1996       *******
                  16.                       Letter on change in certifying accountant            ********
                  21.                       Subsidiaries of the Registrant                       ****

                  27.                       Financial Data Schedule

*                 Incorporated by reference to Registration Statement on Form S-18, File No. 33-30298-D.
                  Incorporated by reference to Form 10-K for the year ended December 31, 1990.
***               Incorporated by reference to Registration Statement on Form SB-2, File No. 33-66190.
****              Incorporated by reference to Registration Statement on Form S-4, File No. 333-2290.
*****             Incorporated by reference to Form 8-K/A dated July 21, 1995, filed on October 3, 1995.
******            Incorporated by reference to Form 8-K dated June 28, 1996, filed July 12, 1996
*******           Incorporated by reference to Form 8-K dated December 26, 1996, filed January 3, 1997
********          Incorporated by reference to Form 8-K/A dated January 20, 1997, filed February 5, 1997

                  (B) Reports on Form 8-K
                  None
                                       38
</TABLE>

<PAGE>



                                                      SIGNATURES

Pursuant to the  requirements  of the Section 13 or 15 (d) of the Securities and
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MAGNUM PETROLEUM, INC.



By:    /s/ Gary C. Evans                     April 1, 1997
     Gary C.  Evans, President & CEO

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Company  and in the  capacities  and on the
dates indicated.


Signature                 Title                                  Date


/s/ Gary C.  Evans       Director, President                    April 1, 1997
Gary C. Evans            Chief Executive Officer and
                         Chief Financial Officer

/s/ Matthew C.  Lutz     Chairman of the Board and              April 1, 1997
Matthew C. Lutz          Executive Vice President of
                         Exploration and Business
                         Development

/s/ David S. Krueger     Vice President and                     April 1, 1997
David S. Krueger         Chief Accounting Officer


/s/ Gerald W.  Bolfing   Director                               April 1, 1997
Gerald W. Bolfing


/s/ Oscar C.  Lindemann  Director                               April 1, 1997
Oscar C. Lindemann


 /s/ Lloyd T.  Rochford  Director                               April 1, 1997
Lloyd T. Rochford


/s/ James E.  Upfield    Director                               April 1, 1997
James E. Upfield


                                       39



<PAGE>